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Cramer Explains What's Behind This Pullback

Some of the hottest stocks, including agriculture, minerals and oil, gave up gains on Wednesday. The action is surprising to many investors because most of these companies recently reported strong earnings, Cramer said. But as the "Mad Money" host explained, there are some legitimate reasons why the materials and industrial stocks sold-off.

First, the Institute for Supply Management's non-manufacturing index fell to 52.8 in April from 57.3 in March. Economists surveyed by Reuters expected the index to remain essentially flat at 57.4.

Second, April retail sales trends were mixed as signs emerged that rising gas prices were beginning to effect consumer behavior, according to the SpendingPulse report from Mastercard Advisors. Apparel sales rose 10.4 percent in April from a year ago, while e-commerce spending surged 19.2 percent last month from a year earlier.

Third, Cramer said the bond market suggests a steep decline in borrowing. Even though there is enough money to lend, companies and individuals don't seem interested in borrowing it. The bond market, by the way, is a gauge on economic activity.

The tricky part, Cramer said, is that both individual investors and hedge funds are trading on margin. In other words, they ware borrowing money to invest, which Cramer thinks is a terrible practice.

"When things are going up, we don't care so much about others using margin," Cramer explained. "But when things are going down, it's a huge problem as people who bought on margin must sell or they will lose everything. Again, just like we saw in 2008. If you don't sell, the butcher margin clerks will sell for you."

Heavily-margined investors are being told to either put up more money, or have their positions sold beneath them. These directives are coming from the same margin clerks that caused the silver sell-off, Cramer said. The problem is that margin selling can send stocks lower than the fundamentals would dictate, Cramer said. In 2008, stocks fell much lower than where they should have gone, Cramer said. He doesn't see the market repeating 2008, though, because we don't have any crises this time around.

The bottom line: Be careful, Cramer said. Know that your hottest stocks are going to cause you the most pain, he added. If you can't take the pain, trim your positions and build some cash.

—CNBC.com with wires

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