Cramer: Short Covering Causes Market Drop

The Dow Jones Industrial Average dropped about 140 points just in the 2 o’clock hour thanks to what Cramer called “an existential crisis among the short sellers.”

The Mad Money host, speaking during his regular Stop Trading! appearance, blamed the dip on short covering. After Fannie Mae yesterday reported a downside surprise, lowered its guidance, cut its dividend and announced plans to issue equity – but still went up in share price anyway – the market’s bears decided to go into hibernation, he said.

“It was just this gut-wrenching moment by the shorts,” Cramer said. “I think a lot of them covered, and now you're seeing there's no bid underneath.”

“There's just too much that was bad in Fannie Mae,” he continued, “for me to believe that that was anything other than a [short] squeeze,” referring to Fannie's increase yesterday.

Investors should wait for the financial sector as a whole to come in before buying a position, Cramer said, because this short covering has “overinflated” everything in the group.

Switching to another segment of the housing industry, Cramer said homebuilders like Centex, Beazer Homes USA and D.R. Horton “have no earnings power whatsoever.” He won’t recommend them right now. “It's not like mortgage rates are coming down,” he said.

Lastly, Cramer called the wind business a “win,” particularly with oil where it is. He likes Quanta Services and Trinity.

Questions for Cramer?

Questions, comments, suggestions for the Mad Money website?