Regardless of whether the short-lived rally during the day on Tuesday was a comeback or just a relief rally, there is one thing that Jim Cramer knows for sure—investors need to sell what they can when they can, not when they have to.
"This market is volatile enough to drive anyone crazy, but I need you to be ready to do some real selling into any strength like we had earlier today," the "Mad Money" host said. (Tweet This)
Cramer wants investors to use the rally to dump anything that is in real danger.
So, what are considered danger stocks? Cramer went down the list.
To start, Cramer said that any Chinese company has to go. China's stock market still has a long way to fall and will likely take its stocks with it. Thus, anything that has been manipulated higher by the Chinese government should be sold.
When Cramer took a closer look, he realized that there is a ton of overvalued garbage in the Chinese market. It is reminiscent of what occurred with the Nasdaq in 2000. Of the 1,113 stocks in the blue chip Shanghai Composite, there are 678 stocks that are trading at extremely stretched valuations.
"I realize few of you own these Chinese listed names, but today we got some nice lift in Chinese companies listed on our markets, like Baidu and Alibaba, and you need to use that strength to sell them if you haven't done so already," Cramer said.
Next on Cramer's danger list are the mineral and mining stocks, along with the entire oil complex. Cramer worries that investors may try to bottom fish some of these stocks, such as Chesapeake Energy or Freeport-McMoRan, and he thinks that is a mistake based on their stretched balance sheets.
He also dislikes the rails as they are connected to coal, which is a fast dwindling business. Even as the rails may rebound on domestic business, Cramer wants to stay far away. The only one he would consider buying is Union Pacific, which has the least amount of coal exposure among the rails.
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Cramer also recommended selling auto stocks, because they are also linked to China. Investors do not know exactly how the auto companies are doing in China at the moment, and the group also has exposure to Latin America. This leads Cramer to believe that the estimates are too high for this group, regardless of the fact that it appears to be a relatively cheap sector.
The final group to be sold is the high-fliers like Wayfair and GoPro, because they are bull market stocks in a bearish environment. Wayfair's business is strong, but the stock has skyrocketed too high for a furniture retailers.
Tuesday taught Cramer the lesson that anything in the Chinese blast zone, mineral and mining, oil and auto groups should be sold into strength.
"They are just not worth the risk for what may turn out to be a very meager reward," Cramer said. (Tweet This)