Gov't shutdown playbook: Cramer's top ‘tell’

The budget debate & the market

(Click for video linked to a searchable transcript of this Mad Money segment)

Cramer says every investor needs to get ready to face a whole new set of . The resulting ripple could be rather serious.

"Once again, the President and Congress are , and their endless partisan rancor threatens not only to shutdown the government, but also to terrify the business community, slam the brakes on the economy, and potentially send the stock market into a tailspin," Cramer said.

What will Cramer be watching?

At times like these, Cramer likes to consult the charts. He believes technical patterns can provide valuable insights into what lies ahead.

The following technical analysis was provided by Mark Sebastian, director of trading at Swan Wealth Advisors and founder of OptionPit.com.

According to Sebastian, the chart to watch closely is that of the Vix.

Speaker of the House John Boehner and President Barack Obama in 2012.
Getty Images

He says volatility generated by political squabbling often follows a pattern.

That is, first rhetoric from Washington become more acrimonious. Then, as the headlines grow more and more frightening, the VIX rallies and the S&P pulls back. Ultimately, however, our leaders make a deal and the VIX pulls back. After that stocks come back into favor and the S&P advances.

In the past it was strategic to buy stocks as the VIX was hitting new highs due to volatility generated by Beltway bickering. That is, the right play was to be greedy when others were fearful, as Warren Buffett so often says.

But, does that mean stocks are a buy when volatility is at its worse this time around? No it doesn't.

That's because in summer 2011 another pattern emerged as the President and Congress squabbled over the debt ceiling and Sebastian says it warrants close attention.

At that time, when lawmakers finally reached an agreement, the Vix didn't pullback significantly. That, Sebastian says, is important.

He takes it to mean that although it seemed that political fighting had generated gains in the Vix, actually there were other sources of fear in the market – they just weren't as obvious.

Therefore Sebastian says, as lawmakers threaten to shut down the government this time around, investors should watch the Vix very closely.

If and when they find common ground the Vix should decline. If it does, that's bullish. However, if the Vix stays elevated it could be a signal that the market is facing other headwinds.

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What's the bottom line?

"We're just entering a Washington induced sell-off phase," Cramer said. "but once our politicians actually make a deal, that won't necessarily mean the stock market will be able to rebound. As Sebastian points out, if we get a resolution but the volatility index refuses to go down, that's a clear sign that stocks might not be ready to go back up. So remember to use the VIX test when our leaders finally make a deal."

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