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Cramer: Market Action Signals Buy, Not Sell

Tuesday, 25 Jan 2011 | 6:15 PM ET

In the final hour of trading on Tuesday, stocks trimmed losses to end flat. Despite what one might gather from the averages, Cramer said it was a "huge day" that included a major comeback.

Reverse Play?
The market cannot sell-off on both good news and bad news.

"At one point we were down almost three quarters of a percent, but then the rebound occurred ... because the market regained its senses after a vicious bout of what can only be called stupidity," Cramer said, adding that it was "frivolous reasoning" that sent the market lower to begin with.

When the Dow was down nearly 100 points, Cramer heard two reasons explaining why. First, people were said to be selling over fears of inflation. Recent rallies in gold, oil, aluminum and other commodities are thought to signal inflation is near, even though those assets sold-off on Tuesday. Second, people were selling because they supposedly thought the world's economies might be slowing. Therefore, the positive earnings reported lately might not have that much merit. This line of thinking, Cramer said, was also supported by the sell-off in commodities.

In other words, some said the markets fell because of rampant inflation and because commodity prices went lower, too. Cramer, on the other hand, thinks that reasoning was "so incredible wrong," investors began to have "sellers' remorse" at the end of the day. As a result, the markets rallied from the lows to end flat. In the end, it seems investors were selling stocks without a real reason to sell.

From current levels, Cramer thinks the market could gain 12 percent to the upside without seeming too expensive. All bets are off, however, should gasoline go above $4 a gallon; the "psychological level" reached in 2008 and consumers froze. If gas goes that high, Cramer said consumers could stop spending. Cramer gets antsy when oil approaches $100 a barrel because anything above that level translates into $4 for a gallon of gas. At that point, consumers freeze and the two-thirds of the U.S. economy that's consumer-driven shuts down.

In the last week, oil went down $10 a barrel. With the principal risk to the market minimized, Cramer said it's time to buy stocks. After all, many stocks failed to rally into Tuesday's closing bell. Cramer suggests looking for names that could have gone higher if it weren't for fears of commodity-derived inflation and commodity inflation-derived slowdown. He likes McDonald's , as well as the banks and credit card companies. The principal beneficiary of the oil decline are the retailers, he said. Kohl's and Walmart are names worth looking at.

When this story was published, Cramer's charitable trust owned Kohl's.

Call Cramer: 1-800-743-CNBC

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