Cramer Makes Sense of Market Selloff

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With theDow Jones closing below 15,000 and the S&P 500 sliding 3% from its all-time high, it's safe to say that sentiment on Wall Street has made a sharp turn for the worse in a relatively short amount of time.

Has the market really changed that much?

Cramer thinks that's a reasonable question for an individual investor to ponder considering so many other sectors could, at least theoretically, take over and drive the next leg of a rally.

On the surface, it would seem the broad sell-off in the entire S&P is overdone, hardly warranted. But Cramer says that's not the case. "Alas, the selling, unfortunately, makes sense," he said.

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Here's why:

Largely the skepticism is due to fears that an uptick in interest rates could derail the advances in the housing. And even though housing represents less than ten percent of the economy, it lies at the very fulcrum of the recovery and by proxy the stock market.

"Why? Because it punches above its weight," Cramer said. That is as housing improves a virtuous spiral ripples across many sectors.

Of course, it impacts the homebuilders such as Toll Brothers and the related stocks such as timber companies, directly.

And as you might imagine, home improvement stores such as Home Depot and Lowe's also feel the impact.

However, the spending then trickles down to suppliers across a wide range of products.

"From companies that sell paint and appliances to carpeting, landscaping and more, I can't tell you how many businesses depend on Home Depot and its rival, Lowe's for business," Cramer said.

That alone is a substantial ripple. But it's the tip of the iceberg.

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Housing also touches the banks. "When homes go up in value, bad loans become good ones. More good ones means fewer reserves for banks. Fewer reserves means more money to lend and, if the government relents, more money to return to shareholders," Cramer said

On top of that housing has quite an impact on retail stocks that you wouldn't otherwise associate with housing - everything from the Gap to Coach. "That's because, as your house increases in value you feel richer," Cramer explained. "And if you feel richer you spend more, which is terrific for retail."

In turn as these groups march higher, other areas of the market such as industrials, materials and commodities become indirect beneficiaries.

It becomes a kind of virtuous spiral.

Unfortunately, when housing gets weaker, the exact opposite is also true. And that's what the market fears right now.

And new data suggests its worst fears may come to pass rather quickly.

"On Wednesday morning new data showed a dramatic decline in the number of refinance and mortgage applications. That Street takes that to mean that rates have gone up so much already that demand is dropping."

And the economy is far too weak to withstand a significant drop in demand for housing.

"Put simply, the only real thing that was going right with this economy was housing. You take it away, you take away a lot of what was driving this stock market higher," Cramer said.

"Sure it is only housing that's slowing. Sure it is only that one small percentage of the giant U.S. economy. But housing's been the driver of so much that is good. You take it away and there's nothing to taking its place," Cramer added.

Again, the selling, alas, makes sense.

Call Cramer: 1-800-743-CNBC

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