CNBC's Jim Cramer on Tuesday explained the life cycle of a market rally, cautioning investors about buying speculative stocks in this current market environment.
"When the Fed meets tomorrow, if it doesn't show any sign of dovishness, if it dismisses the cooler inflation numbers like today's, CPI, consumer price index, you need to brace yourself for a sell-off," he said. "And the epicenter of the decline will not be the solid stocks that deserve to go higher — It'll be the most speculative stocks that've already had huge runs."
Cramer said this rally began with the success of the strongest companies, like the "Magnificent Seven" tech stocks, eventually reaching related sectors like semiconductors, cybersecurity and enterprise software. He then said the rally broadened out to cyclical industries like homebuilders, aerospace and railroads and even retailers as interest rates started to moderate.
Next, he said, many "late-to-the-rally" investors tend to want to see quick wins, gravitating towards speculative stocks with short positions.
"I never like to see this kind of speculative frenzy because of what it represents," Cramer said. "Remember, I'm tracing the life cycle of a rally here, and rallies tend to stop once the rank speculation gets too heavy. I see that happening now."
Cramer called "buy now, pay later" outfit Affirm Holdings, a "poster-child" for this late stage of the rally— a company that's losing money with a risky stock that's has significant gains and could go down if the Federal Reserve indicates rate hikes. He suggested investors take their profits in Affirm now. He also named a number of other stocks in this "speculative cohort," including Roku, Upstart, Carvana and Coinbase.
"I just gave you the anatomy of a rally. We just don't want it to be an obituary of the rally," he said. "If stocks are levitating on a combination of short squeezes and Johnny-come-lately buying, and there's not selling from the people who are being greedy right now, take it from this one-time obituary writer: the funeral parlor beckons."
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