Will the Dow Plummet to 8,260?

Cramer this week wrote up a white paper of sorts, taking into account everything that might go wrong for the markets. His conclusion? The Dow could drop another 20%.

But that will happen only under certain dire conditions. Policymakers in the European Union would have to refuse to cut interest rates to alleviate pressures from the Continent’s new austerity measures. They’d also have to fail to come together in a coordinated effort to solve their common problems, because apparently even the $1 trillion bailout wasn’t enough.

At the same time, we’d have to see a couple of bank and sovereign failures, a 20% decline in economic activity across Europe and a 10% slowdown in Asia. And the euro’s value would have to drop to $1, which would be a 20% decline in what Cramer described as “the most important indicator of day-to-day trading.” The end result would be a Dow Jones Industrial Average that plummets to 8,260.

There are a number of reasons why Cramer doubts the markets are doomed to this fate, though. For one, the Richmond Federal Reserve this morning announced a jump in service employment in Charlotte, N.C., Baltimore, Md., and Richmond, Va. It’s a new and positive trend that follows the strength we’ve been seeing in manufacturing. And remember that ours is a service-based economy.

The St. Louis Fed just yesterday offered its own good news, when it said lending is on the rise. Also, the Philadelphia Fed last Thursday said that both regional manufacturing activity and employment expanded in May, and that the industry’s executives expect more over the next six months.

Plus, consumer confidence is high, which bodes well for retail. Falling oil prices mean that prices at the pump will fall, too, generating another positive for consumers. Mortgages rates are so low as to nullify the loss of that $8,000 first-time homebuyer tax credit. And the National Association of Realtors has said that 18 out of 20 metro areas experienced price increases over the past year.

So as of right now, consumer confidence is up, as is service-job growth. Lending is rising, while gas prices will soon fall. And there’s cheap mortgage money to go around.

“These things do matter,” Cramer said. “They are the tells for the US economy going forward, and therefore the stock market six months out.”

That’s why he doesn’t want Europe to scare investors out the market. Not only does he think that the EU will step up and do the right thing – and “we could have a vicious move up if they do,” Cramer said – but he doesn’t see Dow 8,260 becoming a reality. Not with the aforementioned list of positives, even though they’ve gone largely unrecognized so far.

The strategy then is to stay the course. Sure, the Dow above 10,000 is still too susceptible to Europe’s problems. But as it gets closer to 9,500, investors are ignoring the strength in the US. So, for the meantime, stick with strong stocks like Apple or Intel , as well as the accidental high-yielders that Cramer has been recommending. His newest favorites are Annaly Mortgage , yielding 16%, and the three growth utilities: Pepco , Progress Energy and Exelon .

“Don’t give up,” Cramer said. “Too much good is happening.”

Cramer’s charitable trust owns Apple and Intel.

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