Settle down, no need to worry just yet. In Jim Cramer's experience, he knows stocks that run up in advance of earnings will trade down when they report—even if they report good numbers.
Yet, for some reason, investors didn't seem to understand why Home Depot stock dropped 2 percent on Tuesday when it announced that sales exceeded expectations.
"I blame this sell-off conundrum on the run-up that started last week with the astounding success of Macy's stock, even as the guidance offered by management on the conference call was nothing to write home about," said the "Mad Money" host.
Looking back, Cramer thinks it is safe to say that the whole retail world was rocked when Macy's cut forecasts and then the stock ran up anyway. That is so counterintuitive to patterns of the past.
When Macy's stock began to skyrocket, investors started to believe there was something else in the works here. Perhaps the stronger consumer with a lower gas bill will be spending more on the holidays?
So when Macy's started to run, everything else in the retail world ran, too. If a stock isn't going to drop when it cuts forecasts, then when will it?
Well, the reality hammer has started to come down. Investors are now reacting to Home Depot's report, speculating that the stock has peaked. Then Merrill Lynch downgraded Macy's, confirming that earnings did peak.
"It doesn't help that Urban Outfitters, after a tremendously disappointing number from its flagship store, talked about how the mall is no longer as exciting as it used to be and the stores have lost their pizzazz."
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Cramer still smells a fish with Urban Outfitters. After all, Free People and Anthropologie had great numbers. He thinks perhaps Urban Outfitters was making an excuse if a mall stalwart like L Brands can knock it out of the park.
So before you wave the red flag on retail, Cramer wants investors to consider the fact that some stocks will go lower after reporting when they have run up in advance. They will recover after the decline.
"To me, there's no cautionary lesson here except an admittance that, even with low gasoline and higher employment tailwinds, stocks can still run too much into their earnings reports."
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