Mad Money

Selloffs: Cramer's little known facts

Stocks down? Find out why

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

If you think a stock sells off, simply because it's not an attractive 'buy' anymore, you're sorely mistaken.

"Oh that's how it should be," said Jim Cramer. "Companies that do well should get rewarded with higher stock prices, and companies that do poorly should get punished with lower ones."

But it doesn't always happen that way.

"I've seen it more often than I can tell you," added the "Mad Money" host. "The stocks of good companies get taken down right with the bad ones, even when they report good news."

Why is that?

There are undercurrents in the market that can generate price action that may largely be counter-intuitive. Following are a few of the most common reasons perfectly 'good' stocks can get kicked to the corner."

Adam Jeffery | CNBC

1. Panic. "Some selling is always driven by panic," Cramer explained. That is, investors are worried that short-sellers will get an upper-hand on the entire market, and they lock-in profits in their 'good' stocks, just to be sure they have profits.

2. Hedgie Agenda. In other cases, hedge funds, with somewhat complex agendas, are selling out of positions for reasons only known to them, but they usually have little to do with fundamentals. However, they are large sellers and it creates a contagion.

3. ETF Dumping. Yet other times, the selling is all about big money dumping ETFs. "Because institutional investors handle absolutely huge amounts of money, individual stocks are just too small for them to deal with. Instead they will turn to the the big ETFs." That's important to remember because ETFs are made up of a basket of stocks. If big money sells out of their ETFs, all the stocks held by the ETFs are sold by proxy.

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Of course, Cramer realizes selling is selling and if you have a short time horizon, it's difficult to go against the momentum in the market.

However, if you have a long time horizon the Mad Money host says in the case of 'good' stocks that sold-off, the decline could present a buying opportunity. "Eventually we'll come out of the sell-off and the first companies to attract new money will be those 'good' companies," Cramer said.

Therefore, if the stock of a company sells off, but has a strong balance sheet, significant growth potential, solid profit margins and a good management team – Cramer suggests pulling the trigger.

That is, sometimes, the best move is to buy on weakness.

* Although we all love curling and the Olympics on CNBC television, if you're still looking for money making insights from Jim Cramer, you'll find plenty right here on Mad Money's website. We've scoured the archives and selected favorite articles and videos that are both timeless and relevant; information you can use right now. Look for something every day.

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