Cramer's 3 rules for investors during an unexpected selloff

Stocks are selling off significantly for the first time in a while, so to stem the panic, Jim Cramer decided to go over his rules for how investors should act on a down day.

"First, we need to figure out what's the proximate cause of the decline. Why are stocks going down even if their fundamentals are just fine?" the "Mad Money" host said.

With earnings season coming to a close, Cramer said the disappointing reports are so few and far between they can be counted on two hands: IBM, Ford, Verizon, Twilio, Goldman Sachs, Snap, JC Penney, and Dick's Sporting Goods were the only companies that truly missed the mark.

Cramer has been saying for a month that until President Donald Trump and Congress come to terms, investors should not count on tax reform or infrastructure stimulus.

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Now, with Trump tied up in the Comey-Flynn fiasco, there is even less hope in the market for the benefits of his pro-business agenda.

"People are starting to worry that this political morass could hurt the economy, especially since many stocks, like the banks, are up because investors expect the Federal Reserve will keep raising interest rates," Cramer said. "But if the data gets weaker because of Washington, then the Fed might delay those hikes and the bank stocks will get pounded even harder than they were today."

Therein lies the linkage: the potential for long term scandal in the White House leads to slower economic growth, which leads to the Fed pausing its rate hikes, which leads to bank and transport stocks getting pummeled.

"So, the financials are at the epicenter of this downturn, and Cramer's rule No. 1 is stay away, at all times, from the blast zone," Cramer said.

However, there are some beneficiaries to that hypothetical scenario. It would cause the dollar to weaken, meaning recession-proof companies with large dividends and good fundamentals, like PepsiCo, which ticked up on Wednesday, would get their days in the sun, Cramer said.

"So, rule No. 2 in a selloff: in a selloff that's created specifically by an impression that there's a slowing economy, look for the best-yielding secular growth stocks. Those are magnets for money," Cramer advised.

For rule No. 3, the "Mad Money" host asked investors to take a look at the Nasdaq, which just saw its worst day since Brexit.

"Don't be so eager to buy the former winners that had been going up day after day after day," he said. "These are the stocks of companies that should benefit from a slowdown because they have great growth with or without a slowing U.S. economy. They also tend to be companies that truly benefit from a weaker dollar, since they have a lot of business overseas. So you can imagine that their stocks should theoretically go higher here."

But the problem, he said, is the shareholders who sell on days like Wednesday, eager to take profits after a big gain and before what they believe will be a considerable loss.

"We can't begrudge anyone who sells here," Cramer said. "That said, it's the buyers that need to beware, at least initially."

With fellow shareholders evacuating their positions, Cramer said eager buyers should wait a bit longer before getting into the market, at least until the sellers have wreaked their havoc.

"Let them leave of their own volition and create lower prices before you take the bat off your shoulder. Wait for that big fat pitch and then buy slowly on the way down, not all at once," he said.

Most of all, Cramer stressed patience in a market that seems to be reshaping itself in the midst of a long-overdue pullback.

"On days like today, I've got three simple rules: stay away from the blast zone, buy stocks of companies with good yields that do better in a slowdown, and keep your bat on your shoulder. Let the sellers walk you to first," the "Mad Money" host said. "You don't need to swing for the fences. You just need to get on base. Believe me, with patience, you'll score soon enough."

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