Decide what kind we are dealing with i wish we could say we always know how to respond but the early days of the decline, well, theyre never easy to navigate first, lets borrow a line from the fabulous Anna Karenina all happy rallies are alike. Each sell off is unhappy in its own way. Its so true bull market sent stocks higher and everyone thinks theyre a genius for participating in them big declines much harder they would be the start of a bear market or a glinch. Thats why i want to use history to try to identify some of the common qualities so you can figure out how to handle the inevitable moments of weakness without panicking. First let me offer some historically constructive words of relief, sanity and real, not phony, but real assurance. Theres only been two truly horrendous sell offs since i started investing in 1979. The one day crash of 1987 and the rolling crash of 20072009 i could have down the nasdaq crash but the s p held up well lets deal with these two big ones head on because theyre great examples on october 19th, 1987, black monday, the dow fell 508 points. 22 in a single session. 22 . I was trading that day and even as the previous week had been one of the worst weeks in market history monday hit fast and it hihard it was almost as if there were no buyers to be found from dow 1,738 where it ended that day. It was selling off right into the close. I remember thinking. I remember thinking saved by the bell except it felt there werent many left to be saved. What most people dont remember is that the week before was one of the markets worst weeks ever as the dow already plunged from 2,500 to 2245. That encouraged bargain hunters. They thought they could flip into that strength and that strength never developed the weakness occurred the next day into what became known as terrible tuesday where the dow actually kind of just broke down. The markets simply stopped functioning but i was there and i was actually able to calculate that bottom. The actual bottom that occurred. Then the fed chairman stopped the decline in its tracks when he said he would provide all the liquidity necessary to stabilize the market i still remember that green line when it came over your screen. He enlisted multiple firms around wall street and the markets remarkable twoday rally that took us up more than 500 points the effects of the crash lasted three months but do you know that it took almost 16 months until the averages returned to where they were trading before this big break down the bear market began october 2007 it was a totally different animal the dow fell from 14,164 and didnt bottom until march 9th of 2009 when it landed 6,547. We didnt return to that 2007 level until march of 2013. Why did one sell off and so quickly while the other took six years to unwind . Thats the question that defines the two extremes of unhappy sell offs the initial on black monday was mechanical sell off. The first one that i can remember occurred simply because the stock market failed to be able to function it was reminiscent of two other crashes. You may have heard theories about what caused the crashes but most of them were wrong. All three started with the stock market futures, the s p 500 futures in chicago overwhelming wall street and new york black monday happened because traders didnt understand the powers of the futures market which could flood the stock market with instant unseen supply these days we accept that the futures are worth watching but it wasnt like that back then. Because they were relatively new instruments the power of the futures snuck up on the peoples because they were a much smaller market than the stocks themselves because of the greatly quiddity thougrea great liquidity though, they became the most powerful drivers of stock prices. Even more powerful than the per forma forma formance of what they represent. Now featuresual. We had a big run going into 87. It was a remarkable multiyear rally with nary a substantial decline. I left Goldman Sachs to start my own hedge fund because my returns had been so bountiful. It created such stupendous gains that a group of sales people started selling what they claimed were insurance policies that could lock in gains and stomp out loss for big funds socalled portfolio insurance involved what was known as dynamic hedging. It sounds so dynamic hedging where they said that using futures you could ensure that you would no longer be exposed to stock market risk say down 5 or 10 or whatever the policy you took out determined the idea was that they would let you side step that i have to laugh. Side step the losses its impossible to do that unfortunately much like communism portfolio insurance works in theory but not in life. If anything it accelerated decline and caused incredibly large losses for the actual insured. The people that sold the policies were sharcharltons and never exposed as much but thats exactly what they were dont believe anyone ever tells you any different. Of course at the time, we didnt know that the power of the futures could cause a crash but we figured where theres smoke theres fire if the markets crash theres got to be something going on with the economy. There simply had to be a recession lurking. There had to there wasnt any economic correlation with black monday at all. It was between chicago and new york and when the Treasury Department concluded that the futures set off so much selling that some specialists firms on the floor of the exchange and some brokerage houses step up and stabilize the tape and the latter had no duty to do so but they were supposed to do it and they found many didnt do their jobs i was fortunate enough to be in cash on black monday havi having liquidated earlier in the previous week because the market acted so badly it made my career. For the next 14 years i could show that i had side stepped the crash for real they thought i was a genius, but the truth is i was just frightened of the market and wanted to regroup. But its better to be lucky than good so heres the bottom line. Sometimes crashes have nothing to do with the economy theyre caused by the mechanics of the market. Stay tuned for more examples of this kind of decline and the bear market of 20072009 so you can figure out what to do when they happen. Lets go to keith in texas keith. Hey, jim. How are you doing . I am doing well, how about you . My question is, how do you decide when a correction like we had back in february has made a bottom and its okay to get back into the market . I like to get a sense of whether the selling has run its course first you get a level, where it bounces and then it comes back and it tests that level. If that second test as we call it holds, then its more than likely that you have to come back from the sidelines and buy buy buy. Sometimes crashes have nothing to do with the economy they have to do with the mechanics of the market. Knowing how to respond is essential to your money. On mad money tonight my strategy session continues dont miss my take on the microcrashes that maybe short but could have lasting effects on your view of investing. Then you might know chicken little and the boy that cried wolf from fairy tales but they also play a role in the stock market is it all the feds fault . Not always im eyeing the rational reasons that the market declines when it comes to the central bank. So stick with cramer dont miss a second of mad money. Follow jimcramer on twitter have a question, tweet cramer, madtweets send jim an email to madmoney cnbc. Com or give us a call at 1800743cnbc miss something head to madmoney. Cnbc. Com. Some things are too important to do yourself. Get customized security with 24 7 monitoring from xfinity home. Awarded the best professionally installed system by cnet. Simple. Easy. Awesome. Call, click or visit a store today. Welcome back to a special how to deal with all sorts of declines in addition to mad money. The crime of 87 wasnt really related to the economy shocker. So it was okay to buy stocks 1987 was a rare opportunity that took a little time and when it did, oh, lala. It was the first in the s p futures exercising their power over individual stocks they were like play things for stocks sadly it was the first of many which brings me to the fabled flash crash of 2010. It never came back to stocks because they didnt know their value could be destroyed so quickly. Almost wh imsically. Who wants to keep the ones that can blow up in the blink of an eye . It was pretty much the same deal as black monday of 87 the futures overwhelmed the stock market and buyers just walked away betting there had to be something substantive behind the destruction. It couldnt just be the machines breaking down for heavens sake. It started may 6th of 2010 it lasted for 36 minutes in the 36 minutes the dow fell almost 1,000 points from the 10,000 level it was memorable for me because i happened to be on tv at the same time. Some Money Managers had been speculating that the market was going down precipitously it was on everyones minds back then because there were worries about what would happen if the greeks default on their bonds. Perhaps because i have the benefit of trading on black monday i recognize where it was and when it was happening. The futures were overwhelming stocks we didnt know at the time but a gia giantic order caused fear and many buyers disappeared. They didnt want to wait around to find out what was causing the landslide. They just wanted to get away from it as fast as they could. I called it a phony sell off because it had no basis in economic reality which made it a tremendous buying opportunity. What were seeing right now is unprecedented. That is not a real place. Its too bad the system obviously broke down were going to find out there was a glitch and machines fell it obviously broke down. No, the market didnt work it broke down. The machines broke down. Thats what happens. It didnt work. The machines broke down and thats what happened more on that later many people didnt believe that equities could be that fragile and its shocking. I hope that i have taught you that shocks are not hard assets. Theyre subject to whims that could reduce their value in a heartbeat including mechanical issues anyway, the market regained its equilibrium but not before another round left the asset class entirely and never came back. Okay how about the dow falling right at the open. That was related to fears that the fed was itching to raise Interest Rates many seem to forget but back then the Chinese Market was the most dominant negative story out there people said it could collapse from too much leverage and too lily quiddit little liquidity somehow i find myself on air all the right times to witness the events that had been a monstrously ugly day as a fed official late in the afternoon suggested it was time to raise rates despite the chinese sell off it was an aggressive statement that demonstrated a cavalier attitude toward the markets ugly and fragile mood when we came in on monday august 24th we heard large sell orders and places for major stocks. We werent ready though for the gap that we saw. Big capitalization stocks were shedding hundreds of billions of dollars of value with many 20 down since the market open it was very tough to tell what the real prices were the confusion was that horrific. It was like the fog of war but the dow ended up tallying a decline of about 1,000 points when the smoke cleared at 10 00. I and my partners were squawk on the street were pretty stimied at the time. I remember turning to chat about the sell off his reaction, priceless. The dow is down 1,000 points. And the losses on some of these names unh, verizon, ge down 13 . I dont this is i have to make some phone calls because these are you have to find out these are enormous moves. I got to make some phone calls. I mean, i remember when he said it i said yeah, thats it. I got to make some calls thats how confused we were. We figured there had to be something. You get that kind of decline, right . There had to be something going on in the economy. Somebody knew something we didnt something mysterious or nepharious maybe china collapsed or something in europe that warranted the decline. I was suspicious though because some of the hardest hit stocks were the recession proof names especially the biotechs which for some reason declined harder than all the rest of the market. Think about that that shouldnt be happening. If there was really something wrong with the economy, thats when people buy. Those stocks are often the safest of havens in moments when its the economy at work once again, i suggested it was machines causing the problem that the futures should overwhelm the stocks and that the computers, they had gone haywire. By mid morning we learned that was exactly the case and the stock market then underwent a beautiful metamorphisis. Strong buyers took advantage of the opportunity. It was an excellent time to buy stocks why was there such fear and confusion at the time of the 2010 and 2015 mini crashes i think investors werent ready for either because post 1987 the government put in what were known as circuit breakers. They were supposed to cool these declines by stopping trading momentarily but they created a false sense of security that oddly still exist today even as they failed to work properly on both occasions and did very little to stop the destruction so please, dont believe it. Fear cant be legislated or regulated out of the market. It will always be there. There will always be people that react horribly after an initial event even if its mechanical and not sub ststantive in nature if you can determine its caused by the mechanics of the market breaking down then you can have a incredible buying opportunity. Stay tuned and recognize you have a first class panic on your hand nobody ever made it on panicking but boy oh boy did they coin money taking the other side of the trade. Well go to jeff in florida, jeff. Its an honor. You are very, very kind whats going on . Youre welcome. Heres my question, jim, is there an equation or formula or rule of thumb anything to dictate when or especially what percentage of profits to take off the table when really good gains are up for grabs the show is influx at all times. I used to tell people when things are really bad at the market, you know, look, take some off the table but what i have learned is you have to be a little bit more patient. A really good stock goes up 50 and then you start taking some off and then 100 and then you take out your basis, how much money you put in and then you let the rest ride. Im not as anxious to trade or recommend trading as i used to be i like longer term investing remember nobody ever made a dime panicking. If a sell off is caused by the mechanics of the market, you may actually have an incredible buy buy buy. Buying opportunity. The markets falling the markets falling its more than a nursery rhyme it could teach you a lot about investing. Then dont get fed up. Im break down the fed reserves role in the market and a sell off versus a buying opportunity . The key is a Little Something i like to call Systemic Risk stay tuned and ill explain. Stick with cramer. Apple card. Is a new kind of credit card, created by apple, so its simple and transparent with a new level of privacy and security. It lives here and here. And it will save you 6 on products at apple; like iphone, apple watch, airpods pro and so much more. Apply in as little as a minute, right in the wallet app. Apply in as little as a minute, introducing new Vicks Vapopatch easy to wear, with soothing vicks vapors for her, for you, for the whole family. New Vicks Vapopatch. Breathe easy. Because its tailored to you take the personal assessment and get matched with a proven weight loss plan. Find out which customized plan can make losing weight easier for you myww. Join for free lose 10 lbs. On us. Here we are. Back discussing what to do in a sell off. Sell, sell, sell. And how to figure out what the right approach is given how difficult and different they all are. We covered the crash of 1987 one of the most horrific and quick declines imaginable and yet there was no economic ramification whatsoever. Many thought we had to be on the verge of a recession because the stock market projects what is supposed to happen in the future its kind of an Early Warning system but not that time it was a sell off full of sound and fury that signified nothing. Same with the flash crashes in 2010 and 2015. The sell from 2007 to 2009 was exactly the opposite it was a multiyear decline that started when the Federal Reserve raised rates 17 times in lock step trying to cool an economy that had already the most danged of sell off. What we call Systemic Risk decline and its one that we cant rifle with and we have to spend some time with fortunate it dont happen very often. Call it say twice in 80 years. The first being the Great Depression unfortunately every time we have a severe couple of day decline, we hear this Great Recession bear market invoked. Lots of investors believing that the sky is falling and they never come back and they lose money and its breaking my heart here so lets set the stage back in october of 2007, the stock market peaked at a little more than 14,000 when as i mentioned the fed raised rates over and over and over again 17 times and the economy after teetering for just a bit fell off a cliff and took the stock market with them its one of those things that you could have seen coming if you had paid attention and done a lot of talking and homework or at least paid attention to me. Went back on august 3rd of 2007 the fed continued to raise rates oblivious to the damage it was doing to the real economy. My people have been in this game for 25 years and they are losing their jobs and these firms are going to go out of business and hes nuts, theyre nuts they know nothing. Cramer. I have not seen it like this since i went for half a million shares and i got hit in 1990 this is a different kind of market and the fed is asleep okay but heres the thing. He is shameful. They know nothing they know nothing what did i mean by that. I havent talked to one wall street firm about problems in the mortgage market. Pretty much everyone that followed this market which is incredibly important to the healthy economy knew there was a lot occurring. And talked about how many mortgages of the 2005 vintage. He used a term that i associate with fine wine it was never supposed to happen again. The break depression i was aghast but i had a lot of of friends at a lot of firms so i wanted to see if this 2005 vintage thing was in trouble everywhere i got off the phone and the problem seemed to be spreading like wildfire. And thats why i went off so strongly on my rant. Oh well, the fed didnt listen especially bill poole who at the time was an important fed official years later i found out that my rant was brought up and the fed had a laugh about it we then had some savings and loans thought to be too big t