In a broad-based sell-off of this magnitude, investors have to be prepared to wait and see how low stocks can actually go, CNBC's Jim Cramer said on Thursday.
"At moments like this, you need some touchstones to figure out when the pain is likely to end," the "Mad Money" host said. "This is not the time to be a hero."
And with the major averages down sharply just one day after the Dow Jones Industrial Average hit a record high, Cramer warned investors not to be too aggressive just yet.
"When it comes to this decline, I think it's too early to be really aggressive," he said. "I am worried about your fellow shareholders. They're your worst enemies right here. Many of them are people with big profits, renters who were just along for the ride. They don't want to give up their gains."
So, when will you know that it's time to act? For that, Cramer laid out the 10 "telltale signs" that could drive the market to its true bottom.
So far, the FAANG stocks — Cramer's acronym for Facebook, Amazon, Apple, Netflix and Google, now Alphabet — have led the sell-off, but the "Mad Money" host had a feeling the pain was far from over.
"We need stories about how Facebook's the canary in the coal mine, how industry sources say that Apple's buying fewer components, how Amazon's margins are being squeezed by the $15-an-hour gambit, how European governments are putting the jackboots on Alphabet's neck," he said.
"Once we start getting those premature obituaries, then FAANG may be ready to bounce and even establish a leadership role again," he continued. "But for now, it's not happening."
Shares of the drugmakers — Allergan, Pfizer, Merck and Eli Lilly included — have been rallying for days, and until they fall back to sustainable levels, the market could endure further declines, Cramer said.
"They're too high. Why? Because these big pharma names are bellwether inflation stocks," he said. "They all pay bountiful dividends, and these dividends get less attractive when bond yields are rising, so they tend to get clobbered in this kind of environment and they haven't been yet. I'll feel a lot more comfortable when Merck goes back below $68 and Pfizer sinks below $40."
Cramer said a few things need to happen with the "safe" stocks, securities in sectors like consumer goods that tend to rise when the economy slows and have high-paying dividends.
"Dividend yields are offering no protection here" with bond yields climbing higher, he said. "The pain won't necessarily stop until bond yields stop going higher or the dividend stocks go substantially lower."
This is one of Cramer's top telltale signs for when a sell-off is in full force.
"There's a very common trajectory when the market's going down. First, the analysts will try to keep recommending stocks and they're going to be completely ignored," the "Mad Money" host said.
"When they raise their price targets or even upgrade from 'hold' to 'buy' and no one listens, they're going to switch directions and they're going to start downgrading," he continued. "When those downgrades stop sending stocks lower, then you'll know a bottom is at hand. But we're not there yet."
The market's leaders also need to cave to the selling, something that could be exacerbated if President Donald Trump and China don't agree on a trade deal, Cramer said.
"We have to expect the cyclicals and the rails will roll over. I am concerned about the rails. Once their stocks are derailed, well, then you can start thinking about buying them," he said.
The technical community hasn't yet pointed out the negativity present in stocks' charts, something that could add fuel to the declines.
"When the market gets hit like this, the chartists all go negative because they're seeing double tops, head-and-shoulders [patterns]," Cramer predicted. "You want to wait until their negativity is baked in."
Shares of the cloud kings are, well, in the clouds after last week's tech-filled Dreamforce conference, so a stark correction could be in the cards for these data giants, Cramer said.
"I think the cloud stocks could easily see a 10 percent correction here. I wouldn't touch them until they're down maybe, let's say, 8 to 9 percent from their highs," he said. "Worst case scenario, they don't go down that much and you miss a minor buying opportunity. As much as I love the cloud companies, ... the group is simply way too hot right now."
Oil prices have to stop skyrocketing for the market to reach its bottom, the "Mad Money" host said.
"The market doesn't mind higher oil prices as long as they rise slowly," he noted. "But ever since the president reinstated our sanctions on Iran, the price of crude's been roaring and that's brutal for the earnings of every company that consumes oil, which is most of them. The pullback to $74 was a good start, but we need to see more weakness."
Federal Reserve Chair Jerome Powell needs to scale back the central bank's rhetoric on raising interest rates to combat inflation, Cramer said.
"Last night he said the Fed may need to raise rates more than might be palatable. In other words, Powell thinks he may need to destroy the economy in order to save it. That's deadly," Cramer warned. "The market can't bottom when we're hearing this kind of chatter."
The strength of the dollar is now hurting U.S. companies' earnings, and without the fall of "king dollar," the losses will continue, Cramer said.
"Numbers are coming down all over the place because the dollar's too strong. We saw that from PepsiCo," he said. "Nobody cared that the problem was currency-related. They acted as though the weakness was organic. That was dreadful. The stock can't stop getting shelled."
Cramer's rule No. 1 for the sell-off? Panic is not a strategy, so don't get ahead of yourself.
"The bottom line is that the long-overdue sell-off has arrived," he said. "If you try to pull the trigger and do some buying before some of these boxes are checked, I think your first buy won't be your only buy. So be patient. Pick if you must, but leave plenty of room for still more downside."
Disclosure: Cramer's charitable trust owns shares of Facebook, Amazon, Apple and Alphabet.
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