There can also be times when smaller companies reflect poorly on their larger counterparts. Cramer called the effect “guilt by association,” which can spur larger rotations in the market without much explanation.
“When you’re dealing with high-growth companies that sell into the same arena — cloud, mobile, social, big-data analytics — you have shareholders who own these things only for the momentum and they can be blown out rather easily,” Cramer said.
He suggested that investors think of high-multiple stocks as their own sector, since they are particularly vulnerable to market forces because “they’re expensive and have no yield support.”
“When your stock keeps coming down even though there’s nothing wrong at the underlying company, ask yourself if there’s a larger rotation going on,” Cramer said. “If there is, you have a decision to make, cut and run or buy more.”
Now that broader trends tend to drive the market more than individual stocks, Cramer said it’s worth identifying specific metrics, or market measures, that can predict what most stocks in the index will do.
“If you think that higher oil correlates with economic growth, then you’re most likely to set up a basket of stocks that does well when the economy is accelerating, and you can buy that basket every time oil goes higher,” Cramer said.
Metrics can make or break your portfolio, and Cramer said investors need to realize that key metrics like oil, the dollar, and interest rates play a controlling role in the market and have the power to wreak havoc on stocks regardless of their strength.