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Cramer: 3 reasons why this market rally should be taken seriously

Key Points
  • CNBC's Jim Cramer tells investors they should hold market declines and rallies to the same standards.
  • Instead of fearing rallies and embracing declines, Cramer says investors should be "symmetrical in their judgments."
  • Cramer has three reasons why this market rally should be taken seriously.
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Why this rally should be taken seriously

CNBC's Jim Cramer told investors on Monday that they should hold market declines and rallies to the same standards.

When the market declines, Cramer said, investors tend to think it's happening for a good reason. But when the market is in an upswing, investors tend to be more cautious.

"I hate the hype ... but you have to recognize that the speed of a move tells you nothing about its legitimacy," Cramer said on "Mad Money." "A slow and steady rally is just as truthful as a rapid decline."

"I think it's a mistake to just assume that every sell-off is legitimate and every rally is bogus," he said. "You'll miss a lot of upside that way."

On Monday, the market continued its eight-day rally, with all major indices trading higher.

Cramer points out a few reasons why this market rally should be taken seriously.

1. Earnings

Most companies had better-than-expected earnings and raised their full-year forecasts this quarter, which Cramer said was a good sign.

"The best predictor of a stock's direction" is whether or not the underlying company can beat analysts' earnings estimates and raise its guidance, Cramer said. So far this quarter, companies from Apple to Disney have delivered earnings beats and seen their stocks soar in response.

"When a company beats [the] estimates and also raises its forecast, it is a big deal," the "Mad Money" host said. "If you can't trust a rally based on upside surprises, what can you trust?"

2. Buybacks

Companies are using the excess capital from tax reform to buy back stocks. Although this isn't the biggest driver in the market right now, "buybacks can be tabulated and they are tangible tokens of credibility," he said.

The "Mad Money" host liked Citigroup's buyback the most out of any on the market. The big bank will repurchase 7 percent of its shares every year.

While Citi is still lagging behind some of its competitors, "people are always looking to hang their hat on something, so they hang it on buybacks," Cramer said.

3. Mergers

Takeovers are huge and becoming the norm, Cramer said, asking investors to consider some recent examples: T-Mobile's bid to buy Sprint, Marathon Petroleum's purchase of Andeavor, Broadcom's attempt to buy Qualcomm, or Qualcomm's deal for NXP Semiconductor.

"The real importance of these deals is that they tell you stocks might be cheaper than you think" because companies with extra cash are recognizing the growth potential in consolidating, Cramer said.

Conclusions

Plenty of money managers tend to be wary of rallies because they think stocks go up on "hope," not reality, Cramer said. But while he understood that narrative, he didn't want investors to think that every uptick in the stock market is totally fraudulent, he said.

"I think that'd be a mistake," he said. "Given the stock market's tremendous long-term track record, you know what? I think our bias should really go the other way. Rather than being suspicious of every gain and trusting of every decline, maybe we should be ... more dismissive of declines and maybe give the gains a little more benefit of the doubt."

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

WATCH: Jim Cramer outlines reasons why this market rally should be taken seriously.

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Cramer: 3 reasons why this market rally should be taken seriously

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