Cramer's 6 reasons for why this sell-off makes sense

  • "Mad Money" host Jim Cramer lists the drivers behind the sell-off and explains why it's more of a short-term reset than a long-term catastrophe.
  • Cramer argues that this sell-off was bound to happen for six distinct reasons.

CNBC's Jim Cramer saw Monday's 1,175-point drop in the Dow Jones industrial average as a "reset" for the broader stock market.

"Think of it as the terrifying process that gets us back to more reasonable levels where we can start to have a real advance, not a parabolic move that's destined to be repealed," the "Mad Money" host said.

As concerned investors wait for some kind of resolution to the relentlessly red tape, Cramer argued that the market's downturn made sense.

So, based on a number of trends he has noticed in the last few months, Cramer compiled a list of six distinct reasons for the sell-off.

1. Stock prices

For the first time in the 12 years he's hosted "Mad Money," Cramer can't find a CEO who thinks that the stock of his or her company is still inexpensive.

"I'm struck by their sense of wonderment about how their stocks got to these levels, or at least last week's levels," he said.

While the executives aren't debating their companies' fundamentals, they recognize how difficult it is to take market share, beat analyst estimates and innovate, Cramer said.

"They tend to think that their stocks should have the same trajectory, lifting slowly in fits and starts. They're comfortable with that. They don't trust what we call a parabolic move," he said. "The last leg of the rally was all about index fund money flooding into the S&P 500, not the fundamentals of specific companies, which is why most CEOs find it downright baffling."

2. Bond market

Much of the market's recovery after the 2008 financial crisis has happened during a time of very low interest rates. But when the economy starts to show real improvement, rates start to rise.

"As long as they were rising off low levels, we weren't that worried. At a certain point, though, you reach a place where good news for the economy is then bad news for the stock market," Cramer said. "We reached that point Friday."

When 10-year Treasury yields climbed above 2.8 percent on Friday, it set off waves of worry that the economy was overheating. The revived competition between bonds and stocks spooked investors, leading to declines in utility stocks and other high-dividend equities.

"So on Friday the sellers came for the industrials, which get hurt ... if [investors] think the Fed's going to raise rates too rapidly," Cramer said. "Of course, if rates come back down like they did today ... then we're probably closer to a bottom than we realize, but I don't think we're there yet."

3. Bear shortage

Third, Cramer argued that there aren't enough market-moving skeptics at Wall Street's research firms.

"Research analysts like to have price targets so they know when to tell their clients to take profits, right?" the "Mad Money" host said.

But lately, analysts have simply been raising targets when stocks broke above their original estimates, Cramer said.

"They didn't turn bearish, they stayed all in, and that lack of discipline is now coming back to haunt them," he said.

4. Shareholder shakeout

The last three or four months have seen a slew of new investors enter the market after years on the sidelines.

"These people sensed that stocks were safe again. Now they find, out of nowhere, that it's otherwise. Put yourself in their shoes for a second," Cramer said. "Do these new investors want to buy more on weakness or do they want to cut and run? Get your head around this. It's probably the latter, isn't it?"

The weak hands must be shaken out if the market wants to see a sustained rally again soon, Cramer said.

5. Bank beat-down

The bank stocks should have been a leadership group given the rise in interest rates, but a surprise move by the Fed to restrict Wells Fargo's business took the whole group down.

"Last week, investors were thinking of how Wells might be exactly the kind of bank stock that works in this environment, [with] major potential for dividend boosts [and] buybacks galore. Now it's been taken out of the game entirely," Cramer said.

6. Apple

Finally, Apple's weaker-than-expected earnings forecast had a similar effect on technology stocks as the Wells Fargo news did on bank stocks.

"[Apple] needs to stabilize before it recovers," Cramer said.

Final thoughts

None of the market's leadership groups seem close to a bottom and ready to rebound, so Cramer advised investors not to buy aggressively until obvious leaders emerge.

"For now, you have to understand that this market ran up too far too fast and was due for a decline," the "Mad Money" host said. "That's why last week I told you to raise cash. After today, though, it's getting too late to sell, and if we get another move down, a second 'Pats crash,' it will create too many juicy bargains to ignore. So you can buy some stock tomorrow of high-quality companies that you like at prices a lot lower than you've seen in all of 2018."

WATCH: Cramer's reasons for why this sell-off makes sense

Disclosure: Cramer's charitable trust owns shares of Apple.

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