With the average stock in the S&P 500 down 20 percent from its highs, Jim Cramer sees the backdrop of the stock market becoming more negative by the day. That means his investment strategy must change with the environment.
Investors are gripped by the tremendous deflation of commodities while battling the fear of the Fed raising rates, and the Chinese market changing from day-to-day. This was why Cramer prepared his checklist of events that must occur in order for the market to get out of its current funk.
"I'm just saying that this is an unforgiving market, and in an unforgiving market, you have to expect that things will go wrong, not right," the "Mad Money" host said.
While Cramer thinks it is a good idea to speculate with a position or two in a diversified portfolio, it is important to keep in mind the environment before buying those stocks. Simply put, Cramer misjudged the environment when he recommended Fitbit and Alcoa.
Cramer championed Fitbit from the moment it came public, and the stock soared. And when it got too hot, he said to take profits. However, in the beginning of December, Cramer interviewed CEO James Park and felt reassured about the stock. He was confident that it would be a big holiday seller, and would be a big winner for health and wellness.
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And while Cramer was right about the product of Fitbit, the stock has since fallen apart. First there were many reports of Fitbit competition that came out of the Consumer Electronics Show (CES), then Cramer heard talks of Apple creating a Fitbit killer.
Regardless if these two things actually challenge Fitbit's prospects, the stock still remains speculative.
"This market abhors speculation and I should have recognized that. My bad," Cramer said. (Tweet This)
The same thing occurred with Alcoa. On Monday night the company reported a quarter that wasn't perfect. Cramer chose to overlook issues with the falling price of alumina and its recent acquisition that has fallen behind schedule.
After interviewing Alcoa CEO Klaus Kleinfeld, Cramer recommended that stock because in six months the company will be splitting in two. Cramer believes that the price of alumina won't matter that much and the glitch with the acquisition will be history.
Cramer does believe that one day the market will react positively to the news of Alcoa's split, but his push for a speculative stock was wrong in the short term.
"Just like with Fitbit I misjudged the antipathy people have toward any story with any holes in it, let alone a speculative situation with some actual flaws," Cramer said.
Cramer does still believe in the stories of Fitbit and Alcoa. But right now, it does not matter. Cramer said he was wrong about the environment, and that is a huge factor that he should have taken into account.
"That is why I am issuing a mea culpa for Fitbit and Alcoa. We are not in the right moment for speculation. I should have known better and I regret that I wasn't more cautious, even as I remain confident in the long-term value of both the stocks and the companies behind them," Cramer said.