CNBC's Jim Cramer is confident that he's pinpointed the real cause of the market-wide sell-off that has weighed on stocks for much of the week.
"The real culprit behind today's decline is the same miscreant that's weighed us down for the last couple of days: the unspooling of these obscure products that allowed ... idiotic money managers and neophyte investors to bet against what's known as volatility," the "Mad Money" host said.
Very few stocks can withstand hedge-fun-led pain like this, Cramer warned. Big dividends don't help because the market is declining all at once, valuation is no defense because stocks can always go lower and stock buybacks only help "sop up" the shares being sold, he said.
The only stocks that really work are ones that are able to deliver drastic surprises to the upside, like Twitter after its Wednesday earnings report or GrubHub and Nvidia after their Thursday reports.
"Nvidia reported after the close and it was down hard all day today because of this nonsense I'm describing. But this stock managed to rally in the after-market because the quarter was that fantastic," Cramer said. "If we get a huge down opening tomorrow, which is certainly likely because of what I described, and Nvidia, the stock, goes lower, it might be worth buying. But if it's up big, though, you stay away. It will most likely be pulled down. Don't chase a thing in this market. That's a fool's errand."
Many market-watchers have been wondering what caused this week's rapid-fire sell-off, so Cramer decided to oust the "real culprits" behind the nosedive.
"There are four instruments ... that I am watching to figure out when this portion of stock market nightmare is over," he said. "They're all a mouthful, but you know what? I owe you the whole truth and nothing but the truth, even if you actually need a rocket scientist to figure some of this out."
Cramer began by explaining the idea behind the CBOE Volatility Index, or VIX, colloquially known as the market's "fear gauge."
Volatility, most commonly tracked by the VIX, refers to the amount of uncertainty in the size and direction of changes in the stock market. It is typically measured by the deviation of returns.
For much of 2017, the VIX remained at extremely low levels. Its placid nature piqued Wall Street's interest, leading to the rise of leveraged trading vehicles like the XIV, the VelocityShares Daily Inverse VIX Short-Term exchange-traded note, as ways to short the low-volatility layout.
"Now, it isn't enough sometimes on Wall Street to just own volatility or bet against volatility," Cramer said. "Brokerages know people crave real juice, particularly hedge fund managers, so they invented stocks that allowed you to get twice the gain of the VIX on a given day, or get twice the loss of the VIX if it goes down on a given day," Cramer said.
"These instruments are the proximate cause of the madness you are now seeing," the "Mad Money" host said, pointing to four specific funds exacerbating the pain.
"That's just one theory," the "Mad Money" host said. "Let's say it's the earnings that were driving the rally. Then I could argue stocks as an asset class aren't that overvalued, so you can buy the weakness, especially because the whole market has already become a heck of a lot cheaper in the last few days."
The problem is that the inverse volatility trading products that Cramer has been railing against are clouding the real reason for the sell-off, making it difficult for him and others to discern whether bonds or earnings are to blame.
"Look at like this: we know we're taking enemy fire, but we won't know where it's coming from until the VIX-related smoke clears," Cramer said.
In a strategy session with callers from Cramerica, the "Mad Money" host helped them figure out how to play the market's downturn.
To a caller who wanted to buy a leading sector into the decline, Cramer instantly recommended FANG — with one exception.
"The reason why you're going to buy FANG is because those are classic what we call long-dated assets," Cramer said. "What matters is you have to buy stocks that have a long-term vision with a CEO who has a great vision that are not necessarily susceptible to the economy. And, yes, that's Facebook, that is Amazon, that is Netflix. I am not going to recommend Google here. I would rather see you be in Adobe."
Finally, Cramer vetted the first major acquisition of 2018: packaging product maker WestRock's $4.9 billion purchase of KapStone.
"In short, this KapStone acquisition is, objectively, a fantastic thing for WestRock," the "Mad Money" host said.
Not only will the integration of KapStone be immediately additive to the new WestRock's earnings, but the company is guiding towards $200 million in cost synergies and performance improvements, Cramer said.
Plus, commodity plays like this paper giant tend to benefit during global economic expansions, and despite the slumping stock market, the United States is mid-economic recovery, he said.
"The truth is, the world hasn't stopped just because the stock market's getting slammed. … Life goes on, and all of this chaos may be causing you to miss out on an opportunity in the packaging space, the sector that's always been the place to be at this stage of the economic expansion," Cramer concluded. "WestRock makes sense on the KapStone deal, as does the long-time friend of the show, International Paper. Just be careful to scale into them slowly … but you will have the wind at your back the moment this violent volatility spell is over, and I don't want you to have bought nothing into the downturn."
In Cramer's lightning round, he rattled off his take on some callers' favorite stocks:
Disclosure: Cramer's charitable trust owns shares of Nvidia.