Jim Cramer Shares His Framework for Telling a Buyable Crash From a Real One

Jim Cramer laid out a framework for judging stock market crashes on Mad Money on Thursday. He said most selloffs are mechanical malfunctions worth buying, while only a handful pose real economic threats.

Cramer, the CNBC host who has traded through four decades of market cycles, compared three events to make his case. He cited Black Monday in 1987, the 2010 flash crash and the 2007-2009 financial crisis.

Mechanical Selloffs Look Scarier Than They Are

Cramer pointed to the Dow Jones Industrial Average's 508-point drop on October 19, 1987, as his clearest example. That 22.6% single-day plunge became known as Black Monday.

He blamed a flawed hedging strategy called portfolio insurance for turning a bad week into a historic crash. The strategy used futures contracts to try to cap losses automatically.

He reached a similar conclusion about the 2010 flash crash. The Dow fell nearly 1,000 points in about 36 minutes on May 6, 2010. It recovered most of that loss the same day.

Cramer said a nearly identical pattern played out during the market's sharp opening plunge in August 2015. He blamed futures-market malfunctions, not weakening fundamentals, for both events.

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