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Cramer: When this group rallies, there's trouble coming

Businessman with binoculars
Jacob Wackerhausen | Getty Images

Sometimes all it takes is a scary stock rotation to fuel a rally, Jim Cramer says.

"When money is flowing into stocks, with the mutual funds buying in endless waves and the hedge funds desperate to own stocks rather than shorting them, then you're in the land of the thousand bull dances and you don't have to worry about where the fuel for a rally is going to come from," the "Mad Money" host said.

When no money is flowing into the market, that is when powerful moves in stocks and sectors can occur, Cramer said. This is because when investors are reluctant to invest, money will be pulled out of the least exciting groups of stocks and rotate into sexier names with more lift.

But here is the problem with rotations: without new money flowing in, gains often become zero-sum and will run out of fuel. The leaders will run out of steam with nothing to drive them higher. That is when the worst possible rally can occur — a rally in the wrong stocks.

"You never really want to see any of the consumer staples roaring higher in a sustained advance because it means people think the economy's going to either get worse." -Jim Cramer

These "wrong stocks" names are those that signal a slowdown or recession. Areas like food and drug stocks become the new market leaders.

"You never really want to see any of the consumer staples roaring higher in a sustained advance because it means people think the economy's going to either get worse or simply stay in awful shape for a long time to come," Cramer said.

Cramer considers seeing a stock like Altria, PepsiCo or General Mills spark a powerful rally one of the most horrifying things in the stock market. Often that can cause an immense amount of damage, unless there are vast sums of money coming in from the sidelines.

He also recommended exercising caution when defensive food and drug names also rally. Often just taking note of sector leadership will give investors a strong read to determine if it is a sustainable rally.

In the meantime, Cramer recommended looking for opportunities to buy high-quality names where the stocks — not companies — are broken.

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