Mad Money

Cramer explains the key to understanding market declines

Key Points
  • "Mad Money" host Jim Cramer highlights the importance of metrics for investors.
  • Knowing the relevant metrics can help homegamers understand the market and shield themselves during sell-offs, Cramer says.
  • Cramer gives investors three examples of key metrics to watch during declines.
Cramer on how to understand market declines

Metrics have the power to make or break your portfolio, and Jim Cramer says they are often the key to understanding why stocks move the way they do.

"Sometimes the key metrics that control the entire market suddenly change, and you have to change with them," otherwise you'll never understand why your stocks are suddenly dropping, the "Mad Money" host said.

Now that futures tend to drive the market more than individual stocks, it's worth identifying specific metrics, or market measures, that can predict what most stocks in the index will do.

"So if you think that higher oil correlates with economic growth, then you're most likely to set up a basket of stocks that does well when the economy is accelerating, and you can buy that basket every time oil goes higher," Cramer said.

Cramer suggested that basket of stocks could include airline stocks, which perform well when the economy is strong and people have more disposable income as a result.

Then the complexity of this "algorithmic investing" comes into play, because when oil rises, airline costs rise, meaning airline stocks should fall under pressure, but they don't, Cramer said

And the downside sees the same result. When oil goes down, airlines go down, but not as much as they should since cheap oil is a plus for those stocks.

"The simple fact is that the key metric itself and these algorithmic traders have made owning some groups of stocks beyond mystifying. You could literally own the stock of a company where the earnings estimates are going higher, yet its stock is going lower," Cramer said.

So if investors want to make sense of declines in their portfolios, they need to realize that key metrics like oil, the dollar, and interest rates play a controlling role in the market and have the power to wreak havoc on stocks regardless of their strength.

Watch the full segment: Cramer unpacks algorithmic investing

Cramer explains the key to understanding market declines

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