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Cramer explains what must happen before the market can sustain a rally

Key Points
  • "I think we've got more wood to chop before we can have a sustainable rally," CNBC's Jim Cramer says.
  • "If you start buying stocks of high-quality companies where they're already down 10% to 20% from their highs, I think you'll be rewarded," the "Mad Money" host says.
  • "I think we're in much better shape in this trade war than the conventional wisdom would have you believe, and certainly the talking heads," he says.
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What has to happen before the market can sustain a rally

Three issues triggered Wall Street's deep decline on Monday and things won't get better until they are addressed, CNBC's Jim Cramer said Tuesday.

The major averages managed to recover more than 1% of its losses from the worst trading day of the year, but the "Mad Money" host says there's more work to be done before the coast is clear. The Dow Jones Industrial Average bounced back by more than 311 points the day after plunging almost 770.

"Those three prongs of panic that crushed us yesterday — currency, yields and earnings — still have not been resolved, despite the nice bounce today," Cramer said. "I think we've got more wood to chop before we can have a sustainable rally."

Investors sold stocks in drove when China allowed its currency to slip, pushing the U.S. Treasury Department to call the country a currency manipulator. The Chinese yuan's value versus the American dollar fell below a level unseen since 2008 on Monday. The People's Bank of China raised the value the following day.

In addition, the 10-Year Treasury yield fell more than a quarter point from the week prior to 1.74%, which Cramer said is a measure that signals the economy is "headed into a recession." Because of this, money managers ignored further context - that other countries have lower rates than the U.S. - and assumed the economy was cratering, he added.

"This is what happens when lots of money flows to the U.S. from overseas: rich foreigners ... companies, trusts, they buy Treasurys, which sends prices up and pushes yields down," Cramer said. "Don't get me wrong, that's not good. It creates a strong dollar, hurts American exporters, but it's not necessarily a sign that we're headed for a recession and it does make mortgage money cheaper."

On top of those concerns, U.S. companies with foreign business, particularly Apple and Nike, are readying to "take a big earnings hit," Cramer said.

Trade uncertainty between the U.S. and China makes it a tough market to read. White House economic advisor Larry Kudlow said Tuesday morning that trade talks between the world's largest economies could resume in September. A new round of 10% tariffs on the remaining $300 billion worth of Chinese imports are scheduled to go into effect Sept. 1.

The market can climb again, even if the countries do not come to a trade agreement, Cramer said. In the meantime, dividend stocks are more attractive with lower interest rates, which explains one reason why shares of electronic equipment maker Emerson rallied more than 2% Tuesday, despite having major Chinese exposure and posting a less-than-stellar quarter, the host said.

Amazon, Alphabet and Facebook, who don't rely heavily on China, all saw their stocks improve by as much as 1.53%.

"If you start buying stocks of high-quality companies where they're already down 10% to 20% from their highs, I think you'll be rewarded," Cramer argued.

"I think we're in much better shape in this trade war than the conventional wisdom would have you believe, and certainly the talking heads," he said. "And even if it drags on, there are plenty of companies that will do just fine."

WATCH: Cramer reviews the market action

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Cramer explains what must happen before the market can sustain a rally

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

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