What the Market Is Teaching Us

As stocks ended higher on Wednesday, Cramer said home gamers can learn a lot of the market's action.

The "Mad Money" host has long said nobody ever makes money panicking. Cramer delivered that very message on Tuesday, telling investors to avoid selling industrial stocks because it was too late to sell and they're probably about to bottom. He also said it's too late to buy defensive stocks, including Procter & Gamble , which recently reported a disappointing quarter. The defensive names couldn’t grow fast enough to justify investors paying up for their stocks, he explained.

Just as Cramer had expected, Wednesday marked the start to a rotation out of Procter and into commodity-related industrial names, like Caterpillar and Cummins . To Cramer, it proves there's always a better time to sell than when you are panicking. Being as this is day one of what he thinks could be a sizable move higher, Cramer remains a buyer of industrials. Investors who can no longer bear the pain of this market, he said they will get a chance to sell at a decent price on Thursday.

Cramer said the market also taught us that valuations do matter. One of his rule of thumbs is that investors should be a buyer, not a seller, when a stock has a price-to-earnings multiple of more than twice its current growth rate. When stocks reach that level, big institutions start dumping it and the hedge funds start shorting it. Food and beverage, as well as drug stocks are approaching that upper level, which can only be justified if they have accelerating revenue growth. Right now, Cramer said they don't have it. He's not recommending investors sell these kinds of stocks. Instead, he's simply pointing out what the big money traders are likely to do.

Meanwhile, industrial names have been selling off, as if there is little demand. The reality is that there is a lot of demand from emerging markets, Cramer said. CEOs he's spoke with say there is great demand for oil, copper and gold, for example. The industrials are involved in long-term projects, which allow them to better gauge their future business prospects. Many of the countries, which these companies do business with, have been trying to cool off their fast-growing economies. In turn, investors sold industrial stocks. But with commodity prices falling, a lot of the economies are heating up again. He thinks that bodes well for industrials.

When this story was published, Cramer's charitable trust owned Caterpillar and Cummins.

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