- CNBC's Jim Cramer advised investors to build up cash and wait for the bottom as the market works through the five stages of grief.
- "People don't want to believe the sell-off is real," the "Mad Money" host said.
- "If you lighten up … you're going to be ready for the moment of capitulation, the crescendo, the acceptance that marks the trough," Cramer said.
In the face of a brutal market sell-off that has knocked U.S. stock averages of their highs, CNBC's Jim Cramer on Thursday said the market must run through the grief cycle before investors may spot the bottom.
"If you want to be able to bottom fish at lower levels, make sure you've got a little cash to be able to do it with ... because the real rally can't begin until we work through these five stages of grief," the "Mad Money" host said. "Once that happens, though, you don't want to miss it."
His comments come after stocks finished lower for the third-straight session, dropping the tech-heavy Nasdaq Composite into negative territory on the year. The Nasdaq closed at 12,723.47, a 2.11% decline from Wednesday and a 1.28% decline from the beginning of 2020.
The Nasdaq is almost 10% off its peak close last month, while the Dow and S&P 500 are both more than 3% below their February highs. Some investors are eager to buy the dip and continue to ride the bull run, but Cramer suggested that there's more room for equities to fall due to the bond market, adding that many are in denial about the state of the market.
The investment community has to go through the five stages of grief, which are denial, anger, bargaining, depression and then acceptance, the host said.
"Right now, even after a 6% decline, we've still got a ton of denial," Cramer said. "People don't want to believe the sell-off is real. The market's been so good for so long, and many newer investors have never seen this kind of pummeling, so the downdraft does seem pretty surreal."
Fixed-income investors, worried about inflation that could come with the U.S. economic recovery, are selling bonds and the activity is bleeding into the stock market. Institutional investors taking their cue from the bond market are swapping tech and growth stocks in their holdings for cyclical and value names, and retail investors can't afford to ignore it, Cramer said.
Comments from Federal Reserve Chairman Jerome Powell put further pressure on bonds when he told The Wall Street Journal Thursday that it was monitoring inflation, but stopped short of giving any guidance whether a policy change is on or off the table after about a year of near-zero interest rates.
"Would it have been better if he had said we have to raise rates? Probably, because the bond market reacted viciously with long-term interest rates spiking, and that's what took the whole stock market down," Cramer said of Powell. "In short, stocks are getting hammered because the bond vigilantes, as we call them, are angry."
Cramer suggested a one-day decline of as much as 7% in stocks could fast-track the market to the acceptance stage of grief, "where there's a collective sense that the market's toast."
In the meantime, he said investors should have cash on the sideline and wait for the right moment to find the market bottom in the multi-week decline.
"We're going to get bounces, bounces that make people feel like their bargaining has succeeded, but it hasn't," Cramer said. "If you lighten up … you're going to be ready for the moment of capitulation, the crescendo, the acceptance that marks the trough."