Mad Money

Cramer: Behind selloff—How serious is it?

Apple's guidance will weigh on tomorrow's market: Cramer

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

With the Dow Jones Industrial Average falling for a fifth straight session on Monday, pros are starting to wonder if a more serious correction is at hand.

Concerns began to intensify last week after the S&P 500 closed below its 50-day moving average for the first time since Oct. 9. The Nasdaq briefly fell below its 50-day moving average on Monday.

When sentiment and price action both turn sharply negative, pros such as Jim Cramer often step back and take another look at what's driving the market and why. Then, they attempt to determine how to move forward.

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Looking at the current decline Cramer believes it started with the dismal jobs number calling the recovery into question.

As you may remember, the jobs report released earlier in January showed the economy added 74,000 jobs. Economists had expected 200,000. "The stench of that number has been hanging over our market for many, many weeks," Cramer said.

Also, same store sales released in January showed a critical slowdown. "It confirmed the negative tone set by the employment weakness," Cramer said,

Making the situation that much worse, in mid-January AutoNation Chief Executive Mike Jackson said new-car supplies in the U.S. were rising rapidly, putting pressure on auto makers. "Auto sales had been a bedrock of the recovery," explained Cramer.

That was the beginning of it.

In more recent days, new data showed US single family homes sales dropped 7% in December. "And the Architectural Billings Index turned down—that's very bad, as it's the most important group for the economy's next leg up," Cramer noted.

All told, "not only did we lose retail and autos, we also lost housing related stocks and commercial construction. That's a huge chunk of what worked in 2013," Cramer said.

However, tech, the financials and the had continued to work. ('Had' is the operative word in that sentence.)

"That's why we got hit so hard on Thursday and Friday, it's because two of those three new leadership groups slammed into a wall—the financials and the industrials," all due to concerns that a growing financial crisis in China could hurt those sectors the most. Adding insult to injury, emerging markets woes involving Turkey and Argentina surfaced at the same time.

All told, the bulls collapsed.

That how we got where we are – now the issue becomes, where are we going?

As serious as these issues may be, Cramer doesn't think any of these events are nearly as serious as the collapse of Lehman or other catalysts that led to the downturn and recession.

Instead, he sees these negative catalysts as catalysts whose influence follows a somewhat predictable pattern.

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"You get the initial shockwave. Everything gets crushed. That's where we are now. But then buyers return.

Soon, pros will take a look at what the bonds are saying, and take their cues from them," Cramer said.

Cramer believes lower bond rates will send pros into dividend stocks in a chase for yield.

Next, Cramer thinks pros will seek out single stock stories.

"They will seek out the stocks of companies facing special situations, either where companies are breaking-up, issuing huge buybacks, merging or where activists are playing a role."

That's ultimately how Cramer sees events playing out. That is, he expects the selling to subside and when it does, he expects money to go back to work in div-yielding stocks and single stock stories.

"I do not think we're looking at a recession. I think we're merely in pause mode. That's where I come out right now. I believe we're simply looking at a rotation. Otherwise, it's business as usual."

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