Cramer breaks down why you should prepare for more market pullback

A market sell-off can be followed down the road by another rally, but investors should be bracing themselves for more downside, CNBC’s Jim Cramer said Thursday.

The Dow Jones Industrial Average fell more than 122 points during the session, its fourth straight down day, and the S&P 500 and Nasdaq Composite both slid about 0.20%.

“I am pretty sanguine about this market longer-term, but the disciplined thing to do right now is to raise a little cash, prepare for a pullback … and then get ready to do some buying again,” the “Mad Money” host said. “Just like a gardener who cuts back plants in order to encourage growth, a sell-off can potentially breed a better market down the road.”

Cramer said he worries about the “booming” IPO market. Beyond Meat, the plant-based cuisine maker that entered public markets Thursday, spiked 163% to an implied market valuation of $3.77 billion after its $46 share price debut. The host gave his blessing to buy the stock for no more than $35 a share, but said it’s not a good sign that an unprofitable and unproven company traded at 50-times 2018 sales.

While the stock deserves to be red hot, Cramer said its movement showed that there is a “lack of discipline” and “excess of exuberance” in the IPO market. It could encourage more “reckless behavior” as seen in the debuts of Pinterest and Zoom Video, he added.

Pinterest is trading at 17-times 2019 sales, while Zoom is selling at 47-times sales, he noted.

Carmer said he does not endorse paying more than 10-times sales for any stock, even the fasts growers, because it could come back to haunt him in forthcoming quarters: “It’s all fun and games until someone gets hurt.”

“You don’t make big money in IPOs like this Beyond Meat deal at the start of a major move. You tend to get this kind of action at the end, and I don’t want anyone to get hurt here,” he said. “That’s why I think you should do some trimming and raise some cash … You can put it to work if the market gets hit.”