Cramer pinpoints what sparked the rally: China, 60 Minutes, short-covering and Facebook

  • "Mad Money host Jim Cramer goes over the triggers that sent the stock market surging after a week of pain.
  • Cramer says China-U.S. trade, Stormy Daniels' "60 Minutes" interview, short-sellers and Facebook's data scandal all contributed to the recovery.

As stocks surged on Monday, CNBC's Jim Cramer knew he had to explain what triggered the recovery after the prior week's big declines.

The Dow Jones industrial average, the S&P 500, the Nasdaq, and the Russell 2000 all ended Monday's trading session in the green, each one seeing at least a 2 percent gain.

"How does a market go from dismal and dejected on Friday to beyond exuberant on Monday?" the "Mad Money" host said.

With that question in mind, Cramer explained the four drivers that brought stocks out of their Friday rut.

China

After President Donald Trump placed up to $60 billion worth of tariffs on China last week, investors worried that the Chinese government would retaliate in kind.

China's first move was to announce $3 billion in tariffs on mostly agricultural U.S. goods like wine and fruit, a move many took as a sign that China was afraid of escalation.

On Saturday, Chinese officials went a step further, announcing in the state-owned People's Daily that U.S. companies including Apple, Intel and Boeing would be among the biggest losers in a U.S.-China trade war — a serious possibility given their sprawling China businesses.

"So the market breathed a sigh of relief when the White House put good cop, Treasury Secretary Steve Mnuchin, on Fox this weekend and [he] talked about progress in trade talks, ... saying perhaps the Chinese would show more respect for intellectual property [and] possibly lower tariffs on U.S. exports," Cramer said.

If U.S. policymakers are able to strike a deal with China to negotiate an outcome that benefits the United States and avoids a trade war, it would be a win for the market, Cramer continued.

"That's the essential component of this rally," he said. "An extremely negative story on Friday becomes a hopeful story on Monday, especially if we dodge the Apple, Intel and Boeing bullets."

'60 Minutes'

Oddly enough, Cramer argued that Sunday's "60 Minutes" interview with adult film actress Stormy Daniels, who claims to have had an affair with Trump in 2006, also affected the market.

Ahead of the interview, rumors swirled that Daniels had a tape of her with the president, which would have spurred chaos at the White House, Cramer said.

"A presidential sex tape? Not good for the stock market," he said. "But when the piece ran, there was no tape. It was kind of just a really embarrassing story. [...] The bears needed a tape. They didn't get one."

The shorts

Cramer compared the major averages' positions on Friday to "a coiled spring, ready to jump higher" because of how oversold the market was before the weekend.

He argued that Monday's rally was sparked by traders starting to "cover" their short positions, or buy back borrowed shares of stocks in order to unravel their shorts.

"Remember, though, almost all rallies begin with short-covering," the "Mad Money" host noted.

Facebook

The last thing that contributed to the resurgence was that the market's worst-acting stocks stocks — namely Facebook — started to stabilize, Cramer said.

"The privacy issue caused the stock to fall at one point [on Monday] to levels hit by the stock of Wells Fargo after its cross-selling scandal and Target ... after its data breach," he said.

Facebook's stock is now factoring in almost no growth, trading at a discount to the average stock in the S&P 500 based on 2018 earnings estimates. But given that the company put up 40 percent growth in 2017, Cramer wasn't necessarily worried.

"Sure, there will be people who de-friend the social media titan, but advertisers still love it," he said. "If this rally is going to continue, Facebook needs to bring in an outside investigator whom the feds trust to determine what went wrong and tell them what they need to change. Doing that would send the stock up a quick $10. That would reverberate through the rest of the market."

Final thoughts

"My advice here is to go over your portfolio," Cramer said. "If you own a stock that didn't go up today, you've got a real problem on your hands. If your stocks did go up, maybe let them run a bit, but don't get greedy. We're not out of the woods yet and it's very important that the Chinese decide to give Apple, Intel and Boeing a pass on their tariff hit list. Even so, things look a heck of a lot better than they did a few days ago."

WATCH: Cramer's recipe for the market recovery

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

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