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Cramer: Don't let sellers freak you out. The market's often wrong

  • "Mad Money" host Jim Cramer used Salesforce's stock to highlight the market's irrationality after a recent tech sell-off.
  • Traders tend to overgeneralize, which can cause stocks to move the wrong way, Cramer said.
  • But if investors do their homework, they can be smart about managing their portfolios when unexpected declines happen, the "Mad Money" host said.

It's easy to call the market "crazy" or "irrational" in the face of an unexpected sell-off like the one that happened in the technology stocks this week, CNBC's Jim Cramer said on Thursday.

"But the market's not crazy, nor is it irrational," the "Mad Money" host said. "In reality, traders tend to make wild over-generalizations. They act fast, they paint with too broad a brush and it's a mistake to assume that they really know what they're doing. In short, the market's often wrong."

Even as tech stocks recovered later in the week, Cramer wanted to point out some of the most puzzling names that were thrown away by hasty sellers.

Cramer began with the stock of Salesforce.com, a massive cloud company with its hands in nearly every part of customer relations and enterprise software.

In September, Salesforce traded at $92 a share. The stock surged to $108 ahead of its Nov. 21 earnings report, in which the company beat Wall Street estimates and showed strength in cloud-based sales.

But once the bigger tech rotation took hold, prompted by advances in the GOP's tax reform bill, Salesforce shares took a hit, falling to under $100.

The hit was mainly due to the fact that Salesforce, an international tech company, wouldn't be a major benefactor of corporate tax reform. But Cramer argued that the weakness was exaggerated.

"Initially, when we realized last week that the tax bill would actually pass the Senate, money managers desperately wanted exposure to companies that would get the biggest boost from the new 20 percent corporate tax rate," he explained. "But to buy those stocks, they had to sell something else to raise that cash."

So money managers took to selling tech stocks like Salesforce in order to fund their purchases of the reform's bigger beneficiaries, namely domestic companies with high effective tax rates.

Once the sell-off was over, growth investors flocked back into the stock of Salesforce, which closed at $104.07 on Thursday.

Cramer acknowledged that the sellers weren't necessarily wrong. Traders often use exchange-traded funds, or groups of related stocks, to buy and sell based on market fluctuations, so they may not have known they were selling Salesforce specifically, he said.

Still, the sell-off changed the narrative around Salesforce's business, the "Mad Money" host said.

"As soon as Salesforce started going down, the stock, we began to hear that Salesforce the company may have had less growth than the bulls anticipated. After all, the stock had to be down for some reason, right?" Cramer said. "The day-to-day action in a stock rarely gives you much insight about the actual business, though. Sure, there were sellers, but that doesn't mean the sellers were smart and it doesn't mean they were right."

And Cramer, having spoken to Salesforce CEO Marc Benioff recently at the company's Dreamforce conference, had done his homework and knew business was healthy.

"The market often makes mistakes, so you need to be wary of the endless rationalizations you may hear come after any meaningful decline," Cramer concluded. "Just because a stock is down, that shouldn't mean it should be down. Sellers get things wrong as often as buyers do; they're not omniscient. So don't let them freak you out the next time a high-quality stock gets hit for a no-good reason."

WATCH: Cramer goes over the market's irrationalities

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