Cramer ticks down the components of a good, sustainable rally

  • "Mad Money" host Jim Cramer highlights the difference between good and bad rallies.
  • Banks, technology and the transports can be counted on to deliver trustworthy moves, he says.

Knowing when rallies are sustainable is critical to any investor's portfolio, so CNBC's Jim Cramer looked back on his decades of experience to pinpoint exactly what makes a rally trustworthy.

"There are such things as bad rallies," the "Mad Money" host warned. But Wednesday's jump on President Donald Trump's announcement on tax reform was not one of them, he said.

1. Financials

A rally involving financial stocks, particularly the banks, typically means the economy is healthy, Cramer said. It means that more money is being lent, employment is healthy, and small businesses are confident.

It also signals that job-creating commercial real estate projects are imminent, the government's budget could improve and that more financial activity, particularly mergers and initial public offerings, could be on the way.

"I know that's a lot to put on one group, but I've studied rallies for 39 years and I've never seen a bad one that's led by the banks," Cramer said. "If anything, strength in the financials is a precursor to better things, wider breadth, meaning more stocks go up and a lot more companies that will do better next year over this year."

And for those who worry about the potential for future interest rate hikes, Cramer argued that with a health economy and such low rates, one thoughtful increase wouldn't be so damaging.

"Right now, higher rates will encourage the banks to do more lending. That's good, not bad," he explained.

2. Technology

Cramer also liked to see the tech sector rallying, particularly stocks tied to the data center, mobile and self-driving cars.

Semiconductor stocks Micron, Texas Instruments and Analog Devices saw positive action intraday on Wednesday, taking some attention and heat away from the high-flying FANG stocks.

"When it's just FANG, Facebook, Amazon, Netflix and Google, now Alphabet, it's too narrow and it's almost zero-sum, which is the opposite of a well-composed rally that has legs," Cramer said.

3. Transports

Finally, Cramer felt good about the strength in the transportation space. The rails and trucking colossus XPO Logistics saw gains, both key signs of health in commerce.

Final Thoughts

Where bank, tech and transport stocks are sustainable rally leaders, Cramer said that investors shouldn't hope for consumer goods, drug or utility stocks to drive any given day's gains.

"Today's rally signaled that there are many positive factors at work here, not just a few," the "Mad Money" host said. "I say enjoy it. October's coming, which means we'll have to hear about the long history of crashes in that month. I know I'll have to trot out my experiences trading during the Great Crash of 1987. Hey, it's a big anniversary year! So don't get cocky. That said, you'd be crazy not to feel good about today's action."

WATCH: Cramer on the good, the bad and the ugly of rallies

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