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Cramer's rules for earnings season sell-offs

  • "Mad Money" host Jim Cramer shared his tried-and-true guidelines for playing the unusual pullbacks that happen in the middle of earnings season.
  • Stocks are often "wrong" when there's a wave of earnings reports falling on the market day to day, Cramer said.
  • Cramer's biggest advice? "Go with what you know."

CNBC's Jim Cramer has a special investing method for when a small, but market-wide decline hits stocks in the middle of earnings season.

"I've got a set of disciplines ... that forces you to confront the 'nothing's down enough' lame excuse for not taking action," the "Mad Money" host said. "So let me give you Cramer's rules for sell-offs during earnings season, because earnings season is totally fraught with unusual risk and is quite different from Cramer's rules for everyday sell-offs."

First, Cramer pointed out that the tidal wave of reports can be especially taxing on the analysts that cover stocks. It's not rare for him to hear analysts popping in and out of conference calls because there are so many earnings calls going on at once.

That's why Cramer said investors should not pay that much attention to the movements of certain stocks.

"Take your cue from what I call the craft, the notion that you've listened to the calls, seen the analysts' reactions, and reasoned that maybe a bargain is in the offing because you've done work about what the company's worth," he said. "The stocks are often wrongly priced during the peak of earnings period, at least initially, because of this cacophony of reports."

Second, Cramer tried to pinpoint what caused the sell-off.

Wednesday's disappointments included AT&T's worse-than-expected earnings report (which Cramer thought could be a buying opportunity seeing as the Time Warner merger should boost its cash flow); Chipotle's growth-lacking report (which Cramer thought was not major enough to drag on the market); and Advanced Micro Devices' weak profitability forecast.

"AMD's guidance, which was sub-optimal, had a lasting impact on lots of areas within tech, and many of those areas had been strong," Cramer said. "Still, though, I can't countenance the idea that AT&T, Chipotle and AMD are responsible for the magnitude of today's sell-off."

Weakness in European markets and an intraday dip in interest rates could have also been responsible for the widespread downfalls, Cramer added.

Then, investors come to a fork in the road, the "Mad Money" host said. Do they take advantage of the decline and buy the stocks that have already reported strong numbers, or do they buy the stocks of companies that have not yet reported to seize on (hopefully) positive earnings news?

"I always say you've got to go with what you know," Cramer advised, turning to the stocks that managed to go up amid Wednesday's otherwise dismal action.

First up was Visa, which Cramer liked more than other downtrodden stocks. With a good quarter, good growth and good management under its belt, the payment giant could take off as soon as the sell-off is over, Cramer said.

Second, Cramer turned to Texas Instruments, his top choice for investors who want to own a semiconductor play and still sleep at night. Down a dollar from its highs after a better-than-expected quarter, Texas Instruments could be worth a small position, he said.

Third, the "Mad Money" host had faith in IBM, which he said is on the cusp of an earnings turnaround. Having erased its gains, IBM and its 4 percent yield pay you to wait, he said.

"There's no need to do more than that. [For] all we know, this could be the first day of a larger sell-off ... You don't want to buy all at once. You do want to bet on your own fallibility," Cramer advised.

"I know you could say, 'Why do I ever have to do anything on down days?' The answer is, of course you don't," he continued. "But let's start from the fundamental supposition that we want to buy when merchandise is on sale or being given away, not when it's going up in price. We want to be disciplined. We want to be consistent with what's worked before. This method I just described has worked for me for more than 30 years. No reason it won't work for you and for me now."

WATCH: Cramer's special rules for earnings season sell-offs

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