The market got pummeled on Thursday, with the Dow falling 268 points and the S&P 500 giving up 3.1 percent. Days like this scare people, Cramer said, and understandably so. Our budget deficit is awful, China is slowing down, and countries we never thought could impact us – Greece, Spain and Portugal – are triggering big declines.
So what went wrong? And how can investors profit from even this worst of trading days?
Cramer said to think of the market not in terms of the fundamentals of individual stocks, but rather the fundamentals of money management. While all the aforementioned negatives are valid, it was the mass amounts of wealth wielded by hedge funds that caused today’s losses. These big-money investors tend to move in lockstep, and that means they can swing the indexes in either direction, depending on whether they’re buying or selling. And needless to say, today they were selling. Fears of Europe’s debt problems and the market-unfriendly initiatives coming out of Washington and Beijing forced these guys to rethink their positions, and they unloaded as much of their holdings as they could, taking the entire market with them.
This same kind of action played out in 2008, when the hedge funds all piled into commodities at the same time and then exited en masse. The situation changed, and too many of them were on the wrong side of the trade. The result was the hammering down of the related stocks, so much so that many fell far further than they should have.
But history repeating itself provides the rest of us with an opportunity. Cramer recommended using the same playbook that worked back then, now: look for accidental high-yielders, meaning their dividends are worth more because their stock prices have been pushed down, like Kimberly-Clark or Altria Group ; and seek out similarly punished stocks like Visa or Cisco Systems , that have good fundamentals and just reported strong numbers.
Regardless of how you play it, though, remember:
“What you saw today isn’t a referendum on the fundamentals of different companies,” Cramer said, “but the culmination of a series of mistakes made by big hedge funds gone wild, selling everything to preserve themselves.”
Cramer's charitable trust owns Altria Group, Cisco Systems and Visa.
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