Cramer: Getting Soaked in a Selloff

 | May 17, 2017 | 3:00 PM EDT
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Holy cow, you mean they can go down, too? They can actually sell off and wipe away gains and cause us to lose money?

Yep, this is what happens when we haven't had a selloff of any magnitude in ages. We get people who realize, OMG, this business isn't what I thought. There's nothing wrong with my stocks, but they are going down anyway. Get me out of here, I've had enough of this pain.

To which I say, get used to it. This is what happens. It is a normal occurrence, as normal as rain, it's just that we've had a bit of a drought for ages and we aren't used to it. There are plenty of people who have gotten in and many don't even know what an umbrella is. Many others have never heard of a raincoat. Still others thought rain had been banned by whoever does the banning.

So let's go over my rules for a down day when there hasn't been a down day in ages.

First, we have to figure out what is the real cause of the down day. What's actually linking stocks not to their fundamentals but to the market. I say that because we are almost through earnings season and you can pretty much count on two hands the disappointers. I haven't seen such a positive group of numbers from companies in more than a decade. Think about it. IBM (IBM) , Ford (F) , Verizon (VZ) , Twilio (TWLO) , Goldman Sachs (GS) , Snap (SNAP) , J.C. Penney (JCP) and Dick's (DKS) pretty much stand out as those that really missed. I monitor about 300 companies that have totally delivered and then some.

So it's natural to presume that many investors can't figure out why the heck their stocks are down given that earnings were fantastic.

That's why we have to puzzle over the linkage so we can understand why the good are taken down with the bad.

For a month, I have been saying President Trump is his own worst enemy and all but the Nasdaq has been rolling over because the chances of his economic agenda being passed are slim to none. I have been saying you should forget corporate tax reform and that you shouldn't be thinking about infrastructure -- unless the Communist Chinese are building it -- and that the only thing you can count on is deregulation. I think the latter has gotten you about as far as it can get you right now.

I had said you couldn't count on these because Trump's not in synch with Congress, which he needs for all but deregulation. Now we have a whole other reason why: Trump's in a pickle -- even the diehards admit that -- over what happened with Russia, Comey and Flynn.

Normally I would say what the heck does that have to do with the price of heavy equipment in China, and I would urge you to buy Caterpillar (CAT) . Or I would say stick with tech, it can keep going higher.

But instead we have to contend with the notion of a slowdown occurring because of the possible long-term fallout from endless presidential investigations. It seems like there are elements of Congress that aren't going to let this one go, although, to be fair, if Trump is impeached and found guilty -- and I am just talking about the political dialogue, not what can be expected -- then Vice President Pence becomes president, and is there anyone out there who thinks a) he won't carry out the agenda of the man he serves and b) he will have worse luck than Trump getting it done. The odds of President Pence getting tax reform and repatriation while deregulating are now higher, in my humble opinion, than President Trump's ability to get these things done, that's how bad the rancor is.

Still, there is no doubt that this kind of political morass doesn't help the cause of a strong economy and many stocks are up, particularly the banks, because of a belief that we are going to get two interest rate hikes. If the Fed is data-dependent and the data turn down in part because of Washington, then the Fed might delay the hikes and that will cause the banks to get hammered even harder than they are today.

So they are at the epicenter and Cramer's rule No. 1 is stay away from the blast zone.

Now, we get the linkage: Presidential turmoil equals slowing growth equals a Fed on hold. Of course, it is not just the banks that get hurt. You should always check the transports, as they have been leaders. They've been clobbered here. That again confirms the slowdown thesis that is taking hold.

OK, there is always a flipside. There's always something that goes up when other stocks go down, especially when there are big gains. We know companies that need a stronger economy are going to see their stocks get hurt. We know companies that need higher interest rates will see their stocks collapse.

Whom does it benefit, though?

It's curious, but there are a bunch of beneficiaries. A Fed on hold coupled with a crippled presidency equals a weak dollar. A weak dollar and lower interest rates mean that companies with good yields that benefit from a slowing economy and a high dividend, especially versus bonds, work their way higher even on bad days like today.

The quintessential winners in this situation should be the classic growth stocks with the best fundamentals and good dividends. You should always have your checklist ready, and the one that comes up? PepsiCo (PEP) . Sure enough, the stock spent most of the day in the green. So rule No. 2, in a selloff that's created by an impression that there's a slowing economy, look for the best-yielding growth stocks. They are magnets for money.

Rule No. 3 on a vicious selloff? Don't be so eager to buy the winners that had been going up day after day after day in the last few weeks. Now I am speaking of the Nasdaq. These are the stocks of companies that should benefit from a slowdown because they have great growth with or without a slowing U.S. economy. They also tend to be companies that truly benefit from a weaker dollar as their earnings estimates have been repeatedly slashed because of a stronger dollar. So you can imagine their stocks should go higher as estimates go higher.

Here's the issue, though, why I don't want you to be so eager yet to buy the stocks of these companies: the holders. By this point after a huge run, you've got some terrible holders, really weak shareholders who are running for cover as if they are being pelted by hail and will do anything to get inside, even if it means panicking and selling the good with the bad.

Remember, no one ever got hurt taking a profit. So we can't begrudge anyone who sells. That said, it's the buyers who need to beware, at least initially.

How do I know this? Because this morning I was reading my Twitter feed and I have never seen so many people anxious to buy on the first leg down. I, on the other hand, would rather miss that first wave of sellers and wait until they have created enough destruction that I feel better about coming in. That's why the "don't be so eager" rule has such staying power. Yes, the Nvidias (NVDA) and the Microsofts (MSFT) and the Facebooks (FB) will roar back to life. They will because the fundamentals are terrific. But your fellow shareholders are not so terrific. They are on the run. Let them leave of their own volition and create better prices than you have now. Wait for that big, fat pitch and then buy slowly on the way down. They are not going to call a third strike on you -- thank you, Warren Buffett, for teaching us that concept. (PepsiCo and Facebook are part of TheStreet's Action Alerts PLUS portfolio.) 

Three simple rules:

  1. Stay away from the epicenter.
  2. Buy the stocks of companies that do better in a slowdown, especially if they have good yields versus bonds.
  3. Keep your bat on your shoulder and let them walk you to first. You don't need to swing for the fences. You just need to get on base. Believe me, with patience, you'll score soon enough.

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