When investors encounter hard days in the stock market, they need a schedule for how to respond, Jim Cramer told…
When investors encounter hard days in the stock market, they need a schedule for how to respond, Jim Cramer told his viewers on Friday Mad Money . It means knowing what kind of selloff you are dealing with and how to best navigate. Fortunately, history can be your guide to identify the unavoidable moments of weakness and keep you from panic.
On Wall Street Friday, the Dow Jones Industrial Average fell 298 points, or 1.2% to 24.686. At its low for the day, the index was 539 points. S & P dropped 1.74% and the Nasdaq dropped 2.06%.
Cramer told his viewers that the US stock exchanges have only seen two truly terrible sales since he started trading in 1
979. It was Black Monday crash in October 1987 and rolling crash of the financial crisis from 2007 to 2009. But while both of these reductions saw big losses, they actually were very different.
Many investors do not remember Monday, where Dow Jones Industrial Average lost 22% in a single day. Even less, the market lost 10% during the week before and continued its losses on Tuesday after. While it was not known at the time, this crash was mechanically in nature, caused by a futures market that overwhelmed the ability to handle the flood of transactions. In the confusion, the buyers went aside and prices killed.
Sarnaden did not exist until the Federal Reserve entered into promises of extra liquidity. But in the end, the economy was strong. There was nothing wrong with the underlying companies, the market just stopped working. Therefore, it only took 16 months to recover to their pre-crash levels.
Investors witnessed similar mechanical smelting in the so-called flash crash 2010 and its twin 2015. On May 6, 2010 at exactly 2: at 32 o’clock, the markets for futures markets overwhelmed the markets, only this time machines made the most of the trade . The crash lasted for a total of 36 minutes, during which time Dow dubbed 1000 points from close to 10,000.
In August 2015, another flash crash occurred when it opened with Dow again falling 1000 points in the blink of an eye. In the confusion, traders could not say what prices were real and which were pure imagination. Only those who had strong stomachs risked trading at the heart of the decline, but those traders were well rewarded.
In all these cases, Cramer said the machinery of the market was broken. Even circuit breakers introduced after 1987 could not match the downturns and, in fact, did little to even slow them down. But for those investors who could recognize what really happened, these drops were once (once and twice) in life.
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The great recession was a completely different animal. The market began to fall in October 2007, but did not last until March 2009, almost two years later. Afterwards, it came to March 2013, four years later, for the markets to come back to level. Cramer said that this kind of decline is the most dangerous, but fortunately it’s really once in a life, event that only happens every 80’s or so.
The major recession was caused by the Fed raising rates 17 times in lock steps, trying to cool an already cooling economy. The recession could have been avoided if the Fed did his homework and actually spoke with CEOs, as Cramer did at that time.
Cramer recalled talking to the bankers, as everyone told him that defaults on mortgage rose in a way none of them had seen before. Cramer Famous “You Know Nothing” Ripped Off The CNBC originated from these talks, as Fed did nothing until the first banks began collapsing. The market fell 40% before it finally found its reason.
How can investors identify this kind of devastating decline? Cramer said investors could ask if the economy is on a solid foundation. Are business decreasing? Does employment fall? Interest still rising despite cracking up? If large companies can not pay their bills, the problem can be much deeper than you think.
Today’s market is not like 2007, but Cramer said. The company is stronger, our banking system is stronger and there is still time for Fed to take the brakes off and wait for more data before continuing.
So you’ve just discovered a mechanical breakdown on the market, what should you buy? Cramer said he had always been a fan of unintentional high returns, companies whose dividend dividends spike their stock prices with the broader average values.
He said these shares are always among the first to recover, as their dividends help protect them. He always advised to buy in large scale when the market is falling. That way, if the rebound is fast, you still make some money, but if it’s a major multiday sale, you’ll do even more.
Cramer reminded viewers that when Fed lowers interest rates, almost every market soup is a buying opportunity. But when prices increase, it will be difficult. Not every interest rate rise causes a crash, but only those who drive prices that are high enough to break the economy.
During these times it is important to remember that equities are not the only investment class out there. You can also invest in gold, bonds or real estate to be diversified.
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Bold is not the only reason why the market is falling and Cramer stopped the show with a list of the other common sins.
The first seller is margin call. All too often, money managers lend more money than they can afford and when their games turn south, they are forced to sell positions to raise money. We saw this happening in early 2018 when traders invested in volatility by shortening VIX. When volatility returned, these traders lost a fortune and the entire market was hit.
There are also international reasons for the market to sell, including crises in crises in Greece, Cyprus, Turkey and Mexico. Cramer said that in these cases it is important to ask if your portfolio will actually be affected by these events. Usually the answer is no.
Then there is the market for market introduction. The shares are still playing the supply and demand laws, so when many new market launches hit the markets, money managers often have to sell something to buy them. Fallbacks may also stem from several deficiencies as well as, yes, political rhetoric coming from Washington.
Cramer said that many of these reductions happen over several days. The key is to see if the sale ends at 14.45. Eastern. If so, may be safe to buy. But if not, it will likely be more to sell the following day and it will pay to be patient.
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