Investors have to ask themselves a series of important questions to determine if a sell-off is worth buying or a repeat of the debilitating financial crisis that roiled global markets between 2007 and 2009, CNBC's Jim Cramer says.
First, they have to consider the economy, the "Mad Money" host said. Is business suffering? Is employment — a key indicator for the direction of the stock market — seeing substantial declines? Is the Federal Reserve raising interest rates despite "signs of real cracks" in the business landscape, like big companies failing or unable to pay their bills?
"If the answer is yes, then you have a decline that could be deeply rooted and joined at the hip with the real economy, and that has ... systemic risk, meaning that the entire country could collapse," Cramer said.
But systemic risk is exceedingly hard to come by, which is why Cramer gets so frustrated when market commentators say today's stock market is the same or worse than how it was during the financial crisis.
Still, those economic red flags suggest that the time to sell is upon us, he said.
Second, investors have to know whether there's a system in place to save the economy or kickstart a turnaround. In 2009, then-Federal Reserve Chairman Ben Bernanke's statement that he would not let another major bank go under was what it took for the stock market to start recovering.
Then, the challenge is spotting where the market actually bottoms, Cramer said. He likes to use the Standard & Poor's oscillator, a paid subscription product that measures buying and selling pressure to spot when the market is too oversold.
"When you get a minus five, that indicates that there is most likely too much selling," he said. "When you get a minus 10, you've got to do some buying. We were getting signals that were much worse than that near the bottom as a sign that it was time to buy."
Those who were lucky sold before the recession's damage sunk in, but for those who weren't so fortunate, Cramer offered some solace: if they had waited six years, their portfolios would have erased the crisis-era losses.
"Even in the worst stock market and economic moment of our lifetime, you still did fine if you bought and held," he said. "So here's the bottom line: beware of the Chicken Littles of the world. Be mindful that there are tons of people why cry wolf every time we're down for a couple of days. But, then again, there has been one time where it paid to actually sell, when there was real systemic risk — remember that term — to the U.S. economy. Unless there is again, it's okay to do some selling, but otherwise, maybe just sit tight and wait for those signals to buy."
Stocks endured another bout of volatility Friday, with the Dow Jones Industrial Average losing nearly 300 points, the Nasdaq Composite dropping 2.1 percent and the S&P 500 briefly entering correction territory — 10 percent down from its record highs from September.