Cramer: A little-known security tied to a calm market became a 'toxic cigarette' for this sell-off

Key Points
  • An obscure security designed to be a bet on a calm market has proved to be a bust, CNBC's Jim Cramer says.
  • Credit Suisse says it will end trading for its XIV note later this month.
  • Cramer calls the exchange-traded note a "phony product" and a "toxic cigarette for the market."
VIX ETN halted after falling 85% in after-hours trading

An obscure security designed to be a bet on a calm market has proved to be a bust and fuel for the stock market turmoil, CNBC's Jim Cramer said Tuesday.

Cramer said the VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV) caused an influx of selling in recent days.

He characterized the ETN as a "phony product" and "toxic cigarette for the market."

The XIV is supposed to give the opposite return of the Cboe Volatility index, the VIX, which is often referred to as the market's fear gauge.

To make his point, Cramer compared the action around the XIV to Sunday's trick Super Bowl play in which Eagles quarterback Nick Foles ended up catching a touchdown pass.

"There are moments when you do a fake," Cramer said on "Squawk on the Street."

"In the XIV, you may be having a fake out" because investors in the ETN were forced to sell when the market went haywire, he said.

"I don't want you to bite on the run when it's a pass," said Cramer, meaning the selling related to the XIV may not reflect the true market sentiment.

On Tuesday, Credit Suisse said it will end trading for its XIV later this month after the note fell roughly 85 percent in after-hours trading the prior session.

"So long suckers," said Cramer, the host of CNBC's "Mad Money."

Stocks opened sharply lower on Tuesday, with the Dow Jones industrial average plunging as much as 567 points and dipping into correction territory before swinging 367 points higher.

The Dow remained volatile for the third straight session, trading back-and-back between positive and negative territory after plummeting as much as nearly 1,600 points Monday afternoon.

Cramer said many stocks "are going to be gifts" for investors. He personally likes stocks Boeing and Amazon, which have seen sharp selling in recent sessions.