Washington's inability to reach a deal to avert the looming "fiscal cliff" is beginning to have a negative impact on the U.S. economy just as it was starting to show signs of improvement, Jim Cramer complained Thursday.
From Target to PetSmart to Home Depot and Macy's, many retailers recently reported strong quarterly earnings results, Cramer said. Boeing reported an increase in orders, suggesting a turn in aerospace. Many homebuilders said orders have increased, giving weight to the housing rebound. The automobile industry was as strong as it had been in years, he said.
"It was all coming together and Washington's crushing it," Cramer said, adding that while hiring had picked up in many industries, many corporate leaders are now considering layoffs given concerns about tax increases from the "fiscal cliff." "They want to fire, to cut back, to show they saw the chaos from the Capitol coming and did the right thing for shareholders when the right thing not that long ago was to hire."
(Read More: US Nears Fiscal Disaster: 'Washington Doing Nothing')
The failure of policymakers to reach a deal to avoid the "fiscal cliff" has also negatively impacted stocks, Cramer said. After all, global stocks fell for a seventh day on Thursday on fears of the looming "fiscal cliff."
The key for investors now, Cramer said, is to determine when the selling has run its course. To do so, he suggested monitoring three indicators.
The first indicator is if the market stops selling off in the wake of comments by a lawmaker. To Cramer, if the selling stops when a politician starts speaking, the market has probably bottomed.
Lockheed Martin is the second indicator, Cramer said. If Washington can't address the "fiscal cliff" in time, defense contractors and stocks with big dividend yields will be hit the hardest. As it turns out, Lockheed Martin is both a defense company and a high-yielding stock.
The third and final indicator is whether shares of Cisco Systems, Home Depot and PetSmart sell off.
"These are the three biggest upside surprises since the election — better profits, better sales, and better guidance — and they correctly capture discretionary retail, housing and technology spending," Cramer said. "If these stocks cannot hold their gains, then no stocks can right now, except for the higher yielding names that are regarded as recession proof, stocks like Coca-Cola, Kellogg, General Mills, Verizon and AT&T ."
In the end, Cramer said these three indicators will tell investors when the market has been "fully discounted," providing an opportunity to begin speculating in the stock market itself.