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Jim Cramer thought the vicious linkage between oil and the market had finally ended. That theory went down the tube on Wednesday when a sharp decline in crude and worried money managers took down stocks.
It could have been a lot worse, though.
"This whole day could have been a lot worse, and it was for most of the session. But I saw many of the same buyers who had marked up stocks earlier in the week back in there supporting them after they got hit," the "Mad Money " host said.
This week's petroleum inventory report prompted the decline when it indicated that total inventories rose 4.5 million barrels, to a record 2.1 billion barrels. Oil floods to U.S. shores from overseas, and yet the U.S. still pumps more oil, Cramer noted.
Cramer worried about the report because in order for the stock market to absorb a rate hike, investors must feel confident that the economy is strong. That will not occur if one of the most visible commodities, oil, struggles.
Most investors have not considered the technological innovations in the oil patch, either. They still assume that demand must have fallen off a cliff when supply rises. Yet, many people have embraced fuel efficient cars, and oil companies have seen a dramatic decline in drilling costs.
"The amount of technological innovation that this industry has seen in the last 18 months should dazzle even the most grizzled Silicon Valley veterans," Cramer said.
That is why he regards this decline as an opportunity. Going forward, Cramer has his eye on the cyclicals — companies that need a strong economy to withstand impending rate hikes. Those stocks get sold on days when investors think oil weakness means economic weakness.
However, Cramer warned that oil stocks in particular cannot be bought, because the hot money in the group must flood out of it first.
Cramer noticed another factor, thanks to a pattern surrounding "marking up." This happens when money managers bid up their own stock at the end of the month to make it look as if their fund has performed better than it actually has. The SEC monitors the last day of trading in a given month to ensure that no money manager inflates performance, Cramer explained.
"I have noticed another pattern creeping into this racket: instead of doing it on the last day, the mark-up happens three days before the end of the month," Cramer said.
Cramer noted aggressive buying into the close for almost every group on that day. That means on Wednesday, it is now three days later, and money managers are anxious to get out of the marked up stocks.
"I know many of you still can't believe this stuff happens. Trust me, I've seen this kind of malfeasance with my own eyes and it is one of the lesser evils of the trade," Cramer said.
The last cause for the stock decline is what Cramer referred to as "high multiple-itis." This refers to what happens when a company with a high price-to-earnings multiple disappoints. A company with such a high multiple must beat previous earnings and revenue estimates, and then raise guidance.
Palo Alto Networks fell prey to this when it only beat estimates, but slashed guidance, prompting analysts to cut numbers. The stock fell.
Ultimately, the buyers marking up stocks and oil stopped the decline on Wednesday from being even worse.
"The lack of a real motivation to jump away from the oils, cushioned the decline and led to an anemic rebound that saved the market from what at one point looked like a pretty darned nasty day," Cramer said.