Cramer Remix: Market mechanics can't be trusted
Tuesday was a classic example of why Jim Cramer hates a big opening, and why he always warns investors not to bite on them. He always prefers to reach for stocks, not chase, because when you chase you will get burned.
"We didn't have the ingredients I like to see. We had strong dollar, not weak dollar. We had a chink in the best domestic stocks, the housing sector, and interest rates soared—something that is the bane of the stock market's existence," the "Mad Money" host said.
So, how was the market even able to rally, let alone surge big, for most of the day?
The first reason for the rally was that stocks were dramatically oversold going into the day. The Dow dropped almost 1,500 points in three days, with five straight days of decline in total. So, the market was due for a bounce, even if it was temporary.
However, these positive reasons weren't enough to stop the market from giving back all of its gains and then some in a brutal intraday reversal. Cramer saw many signs flashing in the market on Tuesday that made him skittish about the rally.
Interest rates had a massive spike, and Cramer is old-fashioned enough to know that it's bad news to see any competition to higher yielding stocks. The spike was so dramatic that it surprised many investors who were betting that bonds were the safe haven from the chaos overseas.
What really worried Cramer though, was the lack of leadership in the Federal Reserve as there are various Fed officials who are spouting their point of view regardless of the negative implications they have on the market. Investors do not like uncertainty, and that is what these opinions perpetuate.
"The stock market is a free fire zone until Yellen tells these yahoos to pipe down. The Fed's become untrustworthy with its indecision and multi-tongued guidance, or lack thereof," Cramer said. (Tweet This)
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"This market is volatile enough to drive anyone crazy, but I need you to be ready to do some real selling into any strength like we had earlier today," the "Mad Money" host said. (Tweet This)
Cramer wants investors to use the rally to dump anything that is in real danger.
So, what are considered danger stocks? Cramer went down the list.
To start, Cramer said that any Chinese company has to go. China's stock market still has a long way to fall and will likely take its stocks with it. Thus, anything that has been manipulated higher by the Chinese government should be sold.
Next on Cramer's danger list are the mineral and mining stocks, along with the entire oil complex. Cramer worries that investors may try to bottom fish some of these stocks, such as Chesapeake Energy or Freeport-McMoRan, and he thinks that is a mistake based on their stretched balance sheets.
The final group to be sold is the high-fliers like Wayfair and GoPro, because they are bull market stocks in a bearish environment. Wayfair's business is strong, but the stock has skyrocketed too high for a furniture retailers.
Tuesday taught Cramer the lesson that anything in the Chinese blast zone, mineral and mining, oil and auto groups should be sold into strength.
Read More Cramer: Time to dump your danger stocks
The volatile action on the averages in the past few days also reminded Cramer to re-learn a few valuable lessons.
Cramer added that investors need to accept the fact that neither the machines, nor the people linked with them, can be trusted to get the market to work right when there are huge influxes of capital in either direction in the market. Do not trust the mechanics of the market!
Another lesson Cramer shared is that investors should have a second brokerage account for emergencies. There were many brokerage systems that went down on Monday because they could not handle the capacity on such a big day.
Cramer also reminded us that ETFs are in charge of moment-to-moment pricing and can wreak havoc on individual stocks. Thus, keep a shopping list ready for those machine-led dislocations.
Additionally, corporate buybacks mean nothing on days like Tuesday. The market was still crushed when the buybacks stopped in the last half hour of trading.
Finally, Cramer said to stop with the fear. So if you are an investor who gets scared whenever there is a correction, perhaps you are out of your league.
"There is no sin in knowing you can't handle individual stocks," Cramer said.
After a brutal day that raised the hopes of investors and then crushed them, Cramer decided to discuss what a genuine market bottom looks like, so that Wall Street isn't fooled by another nonviable bounce again.
"When you are searching for a bottom, most people want to nail one specific moment and say here—this low and no lower. But bottoms tend to be less of an event and more of a process," the "Mad Money" host explained.
That is why Cramer turned to Bruce Kamich, a chartered market technician who is a professor at Baruch College, and colleague of Cramer's at TheStreet.com. Kamich pointed out that traders like to look for 90 percent down days as a starting point.
One important sign of a bottom can be seen by the number of new 52-week lows in individual stocks. While it might seem counterintuitive, Kamlich said that in order to have a real bottom the number of 52-week lows needs to dry up.
Additionally, September has historically been the worst month of the year of the . Thus, Kamich anticipates that the market will retest this week's lows again in late September or early October. Then the market may be able to put on a sustained rally.
Ultimately, Kamich's analysis determined that it is still too early to call a bottom in the market. Bottoming is a process, and investors are still in the early stages of that.
Read More Cramer: Never fooled again! Signs of a real bottom
One stock that was able to hold up better against its peers on Tuesday was Buffalo Wild Wings, the sports-oriented beer and chicken-wing chain with more than 1,000 locations across the U.S.
After missing numbers when it reported in late April, Buffalo Wild Wings' stock has been in a rut. After bottoming at $152 in June, the company then delivered a much more well received quarter at the end of July that prompted the stock to roar 11 percent in a single session.
With all of the free cash flow on hand, is it time for this restaurant stock to go wild? To find out how the company plans to implement the cash, Cramer spoke with Buffalo Wild Wings CEO Sally Smith.
"If we can invest in ourselves that is the best thing to do. The buyback of the 41 restaurants in Texas and New Mexico and Hawaii uses up a good chunk of that…We will continue to build out about 50 stores a year, we will certainly continue to remodel but then at some point we need to look at our capital and say okay what else can we do for shareholders," Smith said.
In the Lightning Round, Cramer gave his take on a few caller- favorite stocks:
Canadian Natural Resources: "This is in the natural gas and crude oil sector that I have said is toxic right now, and I'm not going to go back. It is not bottoming yet. If oil goes to $32 we are going to take a new look."
Lannett Company: "This is like Wayfair to me. In another market you really want to own this, it buys a lot of pharmaceutical companies. But right now I think we are just going to stay put. Stay away from it, and we will watch it."