Everywhere Jim Cramer looked on Wednesday he saw the same theme resonate throughout the market — guilty until proven innocent.
In particular Cramer saw the drug companies, media companies, restaurants and oil stocks receive the guilty verdict on Wednesday.
The drug stocks were brought down by an announcement of a bipartisan Senate panel that would examine skyrocketing drug prices. It said it would grill Valeant and Turing, the poster-children for expensive drugs.
As a result, investors who owned shares in companies with pricey drugs were scared and dumped the stocks, regardless of how well the companies are actually doing.
"But here's the tough thing. Most pharmaceutical companies do not price gouge. Most are responsible and only raise prices by small increments at a time. That means when the hysteria dies down, you have to get right back in," Cramer said.
Investors also fled the restaurant stocks after consistent Papa John's reported a weak quarter. Apparently, they found it easier to dump the good with the bad, as large sellers materialized in Domino's Pizza and Yum Brands. It was an obvious guilt-by-association trade, in Cramer's opinion.
The price of crude oil fell as well, and it doesn't matter what stocks were right or wrong in that group. Both the major oil companies and independent players were also very strong lately. Unfortunately that move came to an end.
So, what groups could be next?
Cramer speculated that inventory-heavy retail stocks like Nordstrom, J.C. Penney and Macy's could be next on the chopping block. And while the industrials have been fantastic since August, Cramer is starting to wonder if they could be tiptoeing past the graveyard as the strong dollar comes back to life.
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"For the most part on a day like today, the game of guilty until proven innocent is more powerful than any positive trend out there. And when the guilt comes on, it's never just for one day," Cramer said. (Tweet This)
That means Cramer expects more selling in drugs, entertainment, oil and restaurant stocks. If you're a trader, then it's time to join the fray.
But for investors, Cramer had a stern warning when he said, "Don't play the uptrend that's running higher. Play the downtrend that's running out of steam."
He recommended waiting three to five more days for the punishment to play out, and then buy the stocks that have been crushed. At that point, the best-of-breed stocks may need a few more days of recidivism before bottoming but will prove to be strong stocks for any portfolio.