Jim Cramer has survived so long on Wall Street for many reasons, but the most important one is because he sticks by his rules of investing. One of his top rules is discipline trumps conviction.
"Rules that have kept you out of trouble have to be obeyed. Which is why, despite the pullback today…I can't pound the table on buying anything, because the S&P oscillator that I've followed for decades is now in overbought territory, which tells me we are due for some pain," the "Mad Money" host said.
The Standard & Poor's oscillator is an indicator that Cramer follows, which is a short-term measurement of current market sentiment. It is typically used to indicate how overbought or oversold the market is.
Right now, Cramer sees that the market is linked to three specific inputs. Stocks have tended to go higher if these three inputs are in the bulls' favor: a weaker dollar, higher oil and a stronger Chinese market.
"Now, let me say from the get-go that I may not necessarily agree that these inputs should cause a rally," Cramer said.
Historically, when the oscillator hit danger zone levels, the risk has been too high and the reward too low for Cramer to buy stocks.
"While I have tremendous conviction that the inputs are positive, which would mean you should be buying high quality stocks that you think are undervalued, my discipline nevertheless says hold off, because a better, lower level is coming," Cramer said. (Tweet this)
It is official, until this market goes lower or works off its oversold condition — Cramer is staying on the sidelines. Maybe he will take some profits for his charitable trust, but until that oscillator drops back to lower levels, he won't be pressing the buy, buy, buy button on his soundboard for a while.