(Click for video linked to a searchable transcript of this Mad Money segment)
Confused by the price action in Wednesday's market? Jim Cramer understands.
"There were some huge disparities in the stock market today," Cramer said, "particularly the weakness in industrials and multinationals versus the strength in broad."
If the economy is getting better you'd think all these stocks would rally, and if it's faltering they should all decline.
What gives?
The issue appears to be China.
"You see, right now this market is closely watching signs of slowdown in China. Although China issues economic numbers, they're deemed unreliable by Wall Street, so instead pros draw conclusions about China through the price action in raw commodities, particularly copper and oil," said Cramer.
And the price action in these two bellwether commodities was not good on Wednesday.
"From the looks of copper, which I monitor by looking at the JJC, China is slowing down at a faster pace than we thought."
"Meanwhile, crude oil has been headed down for the last few days, but today's $2 decline in crude took lots of investors by surprise. I could hear the gears turning in these money managers' heads as if they were thinking, 'We can dismiss what copper might be saying, but we can't dismiss what both copper and oil are saying.' "
Therefore, when crude oil seemed to confirm what copper had been suggesting, investors turned negative on industrials, materials and other areas of the market.
"You can see how truly worrisome the price action in copper and oil is, if you own shares in American companies that do business overseas," Cramer said.
Hence the selling.
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However, a slowdown in China isn't necessarily negative for all companies. "In fact, it's good news for many of them," Cramer said.
Therefore other stocks rallied.
"For example General Mills, Clorox and Procter & Gamble are all huge users of these commodities. So when China sends those commodities lower, these big consumer product companies are more profitable."
Also, restaurants benefit. "Chipotle, Starbucks, Panera, Whole Foods and the like are commodity consumers, not producers, so this decline is very good news for all of them," Cramer said.
In fact, enough stocks benefit that the S&P 500 was able to close higher.
"I know this kind of action must seem downright confounding," Cramer said. "But it's how the market works and precisely why I so often say you have to stay diversified."
Call Cramer: 1-800-743-CNBC
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