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Cramer: The huge surge reversal—get ready for more

Cramer: Behind the huge surge reversal

Tuesday was a classic example of why Jim Cramer hates a big opening, and why he always warns investors not to bite on them. He always prefers to reach for stocks, not chase, because when you chase you will get burned.

"We didn't have the ingredients I like to see. We had strong dollar, not weak dollar. We had a chink in the best domestic stocks, the housing sector, and interest rates soared—something that is the bane of the stock market's existence," the "Mad Money" host said.

So, how was the market even able to rally, let alone surge big, for most of the day?

The first reason for the rally was that stocks were dramatically oversold going into the day. The Dow dropped almost 1,500 points in three days, with five straight days of decline in total. So, the market was due for a bounce, even if it was temporary.

Cramer added that the market is extremely oversold now, so investors should expect some volatility to the downside on Wednesday—but only if the market opens down.

The second reason for the rebound was that the Chinese government finally figured out that it needs to stop propping up the junk stocks, and should instead pump liquidity into the system and lower interest rates. In fact, Cramer expects another selloff to occur in China overnight Tuesday to bring it closer to erasing its entire gain since the Chinese rally began a year ago.

"No one is bigger than the market, not even the Party, which seems more like a pajama party these days than a nearly omnipotent totalitarian regime," Cramer said.

Please use this session as a reminder to never reach again, especially when nothing had happened to make it worth reaching for
Jim Cramer
Bay Ismoyo | AFP | Getty Images

The third reason for the rally was due to economic data out of Germany that indicated business remains strong. Good news from Europe means that the impact of China's flailing might not be as widespread as many feared.

The fourth positive was Best Buy, which reported sharply better than expected earnings and same-store sales. It was up 3.8 percent, and Wall Street only expected a measly 1 percent. This was a great sign of discretionary spending in the U.S. and even Apple products.

However, these positive reasons weren't enough to stop the market from giving back all of its gains and then some in a brutal intraday reversal. Cramer saw many signs flashing in the market on Tuesday that made him skittish about the rally.

Interest rates had a massive spike, and Cramer is old-fashioned enough to know that it's bad news to see any competition to higher yielding stocks. The spike was so dramatic that it surprised many investors who were betting that bonds were the safe haven from the chaos overseas.

"They sure didn't seem safe today. Higher rates are not my cup of tea," Cramer added.

Then the dollar soared on Tuesday, which called into question the estimates for big international companies like PepsiCo and Pfizer.

What really worried Cramer though, was the lack of leadership in the Federal Reserve as there are various Fed officials who are spouting their point of view regardless of the negative implications they have on the market. Investors do not like uncertainty, and that is what these opinions perpetuate.

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"The stock market is a free fire zone until Yellen tells these yahoos to pipe down. The Fed's become untrustworthy with its indecision and multi-tongued guidance, or lack thereof," Cramer said. (Tweet This)

The next issue popped up when Toll Brothers reported a quarter that was widely considered disappointing. The market cannot lose housing as one of its most viable themes out there, and this Toll number certainly disturbed that theme.

The downside really accelerated when companies suspended their buybacks. This allowed sellers to easily overwhelm the buyers at the end of the day, and Cramer saw no buys in the last half hour of trading. Additionally, the more than 600-point decline from top to bottom freaked out many investors.

"Please use this session as a reminder to never reach again, especially when nothing had happened to make it worth reaching for," Cramer said. (Tweet This)

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