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Cramer: Is Market Facing Cruel Summer?

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It seems a growing chorus of skeptics are talking about froth in the market coming to head. Are investors about to get smacked with a sell-off?

Bears argue that because the S&P 500 surged 15% in only the first 5 months of the year, the market must be ahead of itself and therefore challenged in the months ahead.

Some even think it's doomed.

John Lund | Digital Vision | Getty Images

Jim Cramer isn't so sure. To get a sense of how much froth is in the market, the Mad Money host thinks it's relevant to compare current conditions to conditions during periods when we know, with certainty, the market was badly ahead of itself.

For the S&P 500, Cramer said the historical period that's most relevant is the period leading up to the Great Crash of 1987.

"Measuring the plateau to peak, the S&P ran from 242 to 336 from December 30th of 1986 to August 24th of 1987," Cramer explained.

The corresponding plateau to peak in the market now starts in mid-November when the S&P traded 1353 to the current peak which is 1657.

Looking at the results, in 1987, the market advanced 40% before the sharp sell-off. Currently the advance in the S&P is about half that. "And more important," said Cramer, "the S&P went to 29 times earnings then, versus 16 times earnings now."

Those numbers suggest to Cramer that the market isn't nearly as overheated as it otherwise would be, if we're facing something as serious as a crash.

Of course, that's just one set of numbers. To either confirm or deny the thesis, Cramer turned to another measure - the Dot-Com Bubble.

Looking at the Nasdaq, the historical period that's most relevant began October 18, 1999, which marked the end of a short-term plateau, and ended March 9, 2000, when the index made an all-time high.

Measuring the plateau to peak, the Nasdaq went from 2689 to 5046. "Think about that move. Think about that rally," said Cramer.

The corresponding short-term plateau began on November 23, 2012, when the composite stood at 2441 and runs to the current high of about 3476 today.

"During the Dot-Com Bubble "the Nasdaq advanced 500 points per month. Currently, it's about 200 points per month."

And looking at the multiples in the Nasdaq, during the bubble, companies were selling at 60, 80 or 90 times earnings.

"Now the average is 17 times earnings," Cramer said. "Not only isn't that a bubble, it's inexpensive historically," he said.

Again, those numbers suggest to Cramer that the market isn't anywhere near levels that he'd consider a cause for concern.

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Of course that's not to say Cramer doesn't think the market can't pull back. Of course he knows that it can. In fact, he'd like it to pullback and cool off, if for no other reason than sharp moves invite skepticism and jitters.

"I know that so-called parabolic moves do lead to crashes as we experienced in 1987 and 2000," Cramer said. "But I'm convinced that this market isn't even remotely similar to those markets. We're just nowhere near those levels."

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