Jim Cramer: Here Is What Usually Stops a Stock Market Slide

 | Feb 05, 2018 | 7:27 AM EST
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How much will you pay for stocks with companies that have good fundamentals, but were cheap at lower interest rates and more expensive now?

That's the "10-year" problem in a nutshell.

Remember there are two ways bonds impact stocks: one is that they make dividend yields less attractive, and the other is that they can make stocks go from undervalued to overvalued.

We aren't yet in a world where bond yields are truly all that competitive with 3.5% dividend plays, but at the same time the utilities and real estate investment trust stocks have already priced that in.

What hasn't been priced in is the visible nature of paying less for future earnings -- the shrinking price-to-earnings multiple that always impacts stocks negatively when rates go higher.

Of course, we were in a good zone before we got to near 3% on the 10-year, where we thought bonds were "under control" because inflation is low. But that employment number on Friday sparked a belief in rising inflation and that hurt stocks for certain.

If you want to analogize, we are now, at last -- and sadly, for the bulls -- in a state where good news is now bad news: the economy is too hot for stocks at these prices.

So, what stops the slide?

Here's what historically done it:

  1. Rates stop going higher. That's a possibility, but it does seem they want to at least touch 3%.
  2. Stocks keep going lower until they readjust. Given that stocks have run so much and are already up 3% for the year, it will be tough to think, at least, theoretically, that we are on firmer ground until we lose that 3%.
  3. Sharply higher-than-expected earnings -- something that we pretty much have already for many stocks, so it's hard to some chart toppers.
  4. Apple (AAPL) stops going down. Let's not understate the importance of this Action Alerts PLUS charity portfolio name. It is cheap, there's a decent case to be made for it, but the hot money is still coming out of it, and as it does, analysts will be more inclined to downgrade it. The surprises of Apple and Alphabet (GOOGL) weighed real heavily on the market -- as did, oddly, the big declines in Exxon (XOM) and Chevron (CVX) .

So, you add all of this up and it says we aren't there yet. We will bottom, but we have to have some sectors first stopping going down -- they never bottom all at the same time before we know that it is not too late to sell.

Again, there was too much bullishness in January. Now, we have to get some bearishness and more oversold conditions before we hit terra firma.

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