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Cramer: Prepare for the Coming Correction

Mad Money viewers may wonder how mediocre earnings last week could garner a better response from Wall Street than decent numbers reported this week. Certainly Corning , Honeywell and Verizon delivered better results than Caterpillar , Eaton and Ford , right?

“When the same news that worked last week doesn’t work this week,” he said, “you know the market’s about to take a break. In short, it needs to go down.”

But how far? An “overbought” market, one where stocks rose too far, too fast, usually corrects in one of two ways: a “steep, vicious sell-off” of about 5% to 7% or “a smaller, slower drop.” For the most part, Cramer said, the latter is most likely.

He predicted a gentler 3% to 5% pullback as last week’s buyers are shaken out of the market, though not the buyers who’ve been in since the rally started in early March. His reason for such confidence? The money-manager thesis he offered during his July 24 show.

After playing it safe and staying in cash, a lot of fund managers have missed this rally. As a result, they’re scrambling to buy what stocks they can. They fear underperforming their benchmark indexes, usually the S&P 500, so they’re holding onto the share they have and picking up what other investors no longer want. This should help to buoy the market, Cramer said.

Cramer named the banks as the least vulnerable group to the coming correction. The sentiment around this sector is already so negative that any potential bad news is most likely already priced in. He recommended Bank of America and Wells Fargo .

Cramer also endorsed health care. This group in particular, he said, is one in which money managers are underinvested, making the stocks less likely to be sold and more likely to be bought. He likes Abbott Labs and Bristol-Myers Squibb .

So who could take the biggest hit from this sell-off? Cramer warned against the rails and industrials, firms like Union Pacific or Freeport-McMoRan , saying they could see a full 5% to 7% decline. The retailers, too, should be avoided, especially Target , Kohl’s and even Wal-Mart .

Technology won’t escape the dip either, with Intel possibly dropping to $18, Microsoft to $22, Amazon.com to $80 and Apple to $152. But Cramer urged viewers to buy any of these stocks at those levels, even Microsoft. He’s a big believer in the secular growth of tech right now, and he expects this sector to rebound.

Stocks have just run a marathon, Cramer said. While he doesn’t expect them to drop and die, as did the Greek soldier whose legend gave birth to the now popular race, “I do think they’ll drop out for a while and refuel until the next big race.”

Cramer’s charitable trust owns Abbott Labs, Bank of America, Bristol-Myers Squibb, Honeywell and Wells Fargo.

Call Cramer: 1-800-743-CNBC

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