Cramer lists 3 surprising forces behind the market sell-off

  • No. 1: No clear-cut reason for selling.
  • No. 2: Mizuho's downgrade of Apple.
  • No. 3: The FANG stocks dipped.

On a day of a relatively wide sell-off, with about 30 percent of Nasdaq stocks seeing a 10 percent downturn, Jim Cramer finds it counterintuitive that people run from the "sale" than to it.

"Notice, I didn't say, 'running from the fire' versus 'to the fire.' Because in the end, this is about solid merchandise being marked down by multiple sellers for multiple reasons," the "Mad Money" host said.

First, Cramer found no clear-cut reason for the pullback that began on Friday. One noted short-seller, Andrew Left, put out a negative call on the stock of Nvidia, calling its run casino-like.

While Cramer said Left's call made sense given that the stock had run from $102 to $168 in just over six weeks, he felt that the call was, more or less, a straight-forward markdown.

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"He wasn't saying that it had done anything wrong or made any mistakes. The stock had accumulated, after going up, up, up, a lot of weaker hands who may not even know all that much about Nvidia ... and these 'tourists' were easily panicked. They were fellow shareholders who had to be shaken out," Cramer said. "The question is, with Nvidia now at just under $150, down from $168, does that amount to enough of a correction to get started with some buys?"

Cramer believes it does, but warned that investors' first buy during this pullback might not be their only buy as there could be more pain ahead.

The "Mad Money" host's second reason for Monday's continued decline was Mizuho's downgrade of Apple from a "buy" to a "hold" rating.

Cramer said the downgrade was thoughtful in the sense that it tried to anticipate a letdown after the release of the next iPhone, but mistaken for several reasons.

"For starters, the report talks about the valuation being too high," Cramer said. "In reality, this stock is cheap relative to most fast-growing tech stocks, particularly the ones that sold off, and all of the consumer products companies, which I think are the most apt comparisons."

The lead analyst, Abhey Lamba, also questioned Apple's growth prospects in China and India. Cramer countered that China's lull in buying is temporary, and that Lamba underestimated how much Indian consumers would want the iPhone.

"I bet when the infrastructure — it's mostly 3G — switches to 4G [and] is built out, phone companies will compete against each other to offer them at reasonable prices like they do everywhere else," he said.

Cramer also knocked the analyst's challenge to Apple's service revenue stream, which the "Mad Money" host thinks will only accelerate as the company builds out its ecosystem.

"Finally, the analyst outright dismissed the new Homepod or anything else that's ancillary to the phone as unimportant," Cramer said. "I fundamentally believe that Apple's got a level of brand loyalty that you would be foolish to discount."

Still, a downgrade on a stock as popular and visible as Apple carried weight and likely contributed to the decline, Cramer said. But to him, all that has really happened is the stock of the high-flying consumer products giant just got cheaper.

In an emailed response to this story, Lamba expanded on some of his points in the downgrade, adding that he and his team at Mizuho respected Cramer's feedback.

"[Cramer] thinks Apple should be valued as a fast growing technology company. We think it was valued as a fast growing technology company when it was growing fast," Lamba wrote.

The analyst argued that Apple has become a cyclical company, with its revenue and earnings growth tied to iPhone releases. He also pointed out that in the last fiscal year, Apple's revenue declined 8 percent and its earnings per share fell 10 percent year over year.

"Current fiscal year revenues and EPS are expected to grow by only 5 percent and 7 percent respectively," he wrote. "Yes, they will grow faster next year, but the following year remains questionable. In our view, these are not the characteristics of a fast growing technology company."

With regard to China, Lamba said time will tell if the buying lull is temporary. "We think it will be cyclical in nature," he wrote. "We are not expecting strong growth in installed base, which is critical for the company."

On India, however, the analyst disagreed with Cramer, saying that 4G adoption there will not be as smooth as it was in China because of India's robust 3G networks.

"India has a great 3G network, which works very well. As such, Indian carriers will not be in a rush to move people to the new network," Lamba wrote. "Also, we have spoken to all of the leading carriers in India and they do not want to subsidize phones despite of whatever Apple may desire. Apple wants them to push its phones but only about 5 percent of phones are sold via carriers in India."

Lamba and his fellow analysts agreed that Apple's service revenue stream would expand meaningfully, but said that expectations were high and it would be difficult for the company to deliver much upside.

And while Lamba wrote he was not entirely dismissive of the Homepod speaker's release, he needed more information to be truly convinced of its earnings potential.

"Will it generate some sales? Yes. Will they be meaningful? We don't know yet. If watch is any indication, it can be tough to move the needle for Apple," he wrote. "We think it is too early to give them credit for new products."

Cramer's third reason for the decline was that the FANG stocks — his acronym for Facebook, Amazon, Netflix and Google, now Alphabet — dipped along with Nvidia and Apple.

Looking at next year's earnings estimates, Facebook and Alphabet are still inexpensive, giving investors a chance to buy them on this kind of weakness if they do not own shares already.

"Amazon and Netflix are much harder for me because they're so difficult to value," Cramer said. "All I can say is there's nothing wrong with either of these companies, but the stocks do take breathers now and then, and when they do take them, well, they've been rewarding to buy. I don't know why this time would be any different."

And what may look like a larger rotation into bank, retail, oil and health care stocks may soon unravel, Cramer warned.

Bank stocks need the Federal Reserve to raise interest rates on Wednesday to continue rallying, which is out of their hands. Aside from Nordstrom exploring going private, the rally in retail seems knee-jerk to Cramer. The oils rely on crude's movements if they want to hold up, and health care needs a catalyst like a takeover, and Cramer cannot find any on the horizon.

"In other words, unlike the tech companies I've highlighted, these value plays do not really control their own destiny at this point in the business cycle. It's their inability to control their own destiny that makes their stocks so difficult to rotate into, or even gravitate toward, if there's such a big sale going on in the high-growth space," Cramer said.

All in all, the profit-driven selloff is good news for the bulls, who may have been worried about some market-wide sea changes as earnings season winds down.

"The bottom line is that all that cuts for an orderly decline that gives you a chance to buy stocks for well below where they were selling last Thursday. In other words, the sale's still on and that's not something to freak out about. It's something to embrace," Cramer said.

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