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 entering the market, that is when powerful moves in stocks and sectors can occur, Cramer said. This happens when investors are reluctant to invest and money is pulled out of the least-exciting groups of stocks, and rotated into sexier names with more lift.
But here is the problem with rotations: Without new money flowing in, gains often become zero-sum and can run out of fuel. The leaders will lose steam with nothing to drive them higher.
That is when the worst possible rally can occur — a rally in the wrong stocks.
In Cramer's experience, "wrong stocks" are those that signal a slowdown or recession. Areas like food and pharmaceuticals 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 stocks like Altria, PepsiCo or General Mills sparking a powerful rally one of the most horrifying things for the stock market. More often than not, it can cause an immense amount of damage, unless there are vast sums of money coming in from the sidelines.
The "Mad Money" host also recommends exercising caution when defensive food and drug names rally. Taking note of sector leadership can give investors a strong read on whether the rally is sustainable or on the brink of collapse.
In the meantime, Cramer recommends looking for opportunities to buy high-quality names where the stocks — not companies — are broken.
Disclosure: Cramer's charitable trust owns shares of PepsiCo.