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When investors face difficulties in the stock market, they need a game plan to react, said Jim Cramer to his Crazy money Friday viewers. This means that you need to know what type of sales you are facing and how to best manage it. Fortunately, history can help you identify those inevitable moments of weakness and not panic.
On Friday, the Dow Jones Industrial Average fell 298 points, or 1.2%, to 24,686 points. At its lowest for the day, the index was down 539 points. The S & P slid 1.74% and the Nasdaq 2.06%.
Cramer told his viewers that the US stock markets have seen only two really horrible sales since he began trading in 1979. It was the Monday's black crash in October 1987 and the stock market crash. financial crisis from 2007 to 2009. the declines resulted in huge losses, they were actually very different.
Many investors do not remember Black Monday, where the Dow Jones Industrial Average lost 22% in one day. Even fewer people remember that the market had lost 10% in the previous week and continued its losses the following Tuesday. Although it was not known at the time, this collapse was mechanical in nature and was caused by a futures market that prevented the flow of transactions from being processed. In the confusion, buyers veered off and prices plummeted.
The carnage was not stopped until the US Federal Reserve intervened with promises of additional liquidity. But in the end, the economy was strong. There was nothing wrong with the underlying companies, the market simply stopped working. That 's why it only took 16 months to regain their level before the accident.
Investors witnessed similar mechanical collapses during the so-called "flash crash" of 2010 and its twin in 2015. May 6, 2010 at 14 h 32 accurate. In the East, the futures markets have once again flooded the markets, but this time it is the machines that do most of the trading. The collision lasted 36 minutes, during which the Dow plunged 1,000 points out of nearly 10,000.
In August 2015, another flash crash occurred at the opening, the Dow losing 1,000 points again in the blink of an eye. In the confusion, traders could not tell which prices were real and which were pure fantasy. Only people with a strong stomach could negotiate at the heart of the decline, but these traders were largely rewarded.
Cramer said that in all these cases, the markets machine was down. Even the circuit breakers put in place after 1987 have not been able to stem the declines and have not even done much to slow them down. But for investors who could recognize what was really happening, these declines were a unique gift (and good, twice) in a lifetime.
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The great recession
The Great Recession was a totally different animal. The market began to fall in October 2007, but reached its low point only in March 2009, almost two years later. Subsequently, it was not until March 2013, four years later, that the markets rallied. Cramer said that this type of decline is the most dangerous, but fortunately it is truly a single event, which only happens every 80 years or so.
The Great Recession was caused by the interest rate hike 17 times in a row by the Fed, which tried to calm an already declining economy. The recession could have been avoided if the Fed had done its homework and even talked to the CEOs, as Cramer had done at the time.
Cramer said he spoke to the CEOs of the banks, who had all told him that the default on mortgages was up, as never before. Cramer's famous speech on "They know nothing" about CNBC stems from these conversations, as the Fed did nothing until the first banks began to collapse. The market dropped by 40% before finally finding its place.
How can investors identify this type of devastating decline? Cramer said investors can ask if the economy is building on solid foundations. Are the business in decline? Is employment down? Do interest rates continue to rise even as cracks appear? If large companies are unable to pay their bills, the problem could be much bigger than you think.
Today's market
The current market does not look like 2007, however, said Cramer. Business is stronger, our banking system is stronger and there is still time for the Fed to slow down and wait for more data before proceeding.
So, you have just spotted a mechanical breakdown on the market, what should you buy? Cramer said he'd always been a fan of accidental high yield stocks, companies whose dividend yield is skyrocketing because their share price is falling with the broader averages.
He said these stocks are still among the first to rebound because their dividends help protect them. He advised to always buy large scale as the market goes down. In this way, if the rebound is fast, you will still earn some money, but if it is a larger stock sold in several days, you will do even more.
Cramer reminded viewers that when the Fed cuts interest rates, almost every market drop is a buying opportunity. But when he raises rates, things get tough. However, not all rate hikes cause a crash, but only those that push rates high enough to break the economy.
During these times, it is important to remember that stocks are not the only class of investment. You can also invest in gold, bonds or real estate to stay diversified.
On the real money side, Cramer said the Fed was doing better than it had seen since 2006-07. Find out what it means and get more of his ideas with a free trial subscription to Real Money.
It's not just the Fed
The Fed is not the only reason for the market downturn and Cramer closed the show with a list of other culprits.
The first culprits are the margin calls. Too often, fund managers borrow more money than they can afford and when they take the gamble, they are forced to sell positions to raise money. We saw this happen early in 2018, when traders were betting against market volatility by bypassing the VIX. When volatility returned, these traders lost a fortune and the entire market suffered.
The market must also be sold for international reasons, including crises in Greece, Cyprus, Turkey and Mexico. Cramer said that in these cases, it's important to ask if your portfolio will actually be affected by these events. Usually the answer is no.
Then there is the IPO market. After all, stocks are subject to the laws of supply and demand. Thus, when tons of new IPOs arrive on the market, fund managers often have to sell something to buy them. The declines can also put an end to multiple shortfalls, as well as Washington's political rhetoric.
Cramer said many of these drops occur over several days. The key is to watch if the sale ends at 2:45 pm. Is. If yes, that can be safe to buy. But otherwise, there will probably be more sales the next day and it will pay to be patient.
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