Jim Cramer says the recent AI stock sell-off echoes a crucial lesson from the 1987 market crash

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Mad Money

Published Mon, Oct 19 20266:22 PM EDT

Key Points

• CNBC’s Jim Cramer said the 1987 stock market crash offers an important lesson that can be applied to the recent AI sell-off.
• He said falling share prices don't necessarily signal trouble at the underlying companies.

CNBC’s Jim Cramer said the 1987 market crash offers an important lesson that can be applied to the recent AI stock sell-off.

Monday marked 39 years since Black Monday, when the Dow Jones Industrial Average plunged 22.6% in a single session. The historic crash was fueled in part by portfolio insurance strategies designed to protect investors against losses. Instead, they triggered waves of automatic selling that sent stocks plummeting.

"Rampant, automatic selling destroyed stocks, even as the underlying companies were quite strong," the "Mad Money" host recalled. "In retrospect, it was a spectacular buying opportunity."

Cramer sees echoes of that disconnect in the current AI trade.

The S&P 500 fell nearly 2% last week, its biggest weekly decline since late June, while the Nasdaq Composite tumbled 4.5%, snapping a four-week winning streak. Semiconductor and data center stocks were particularly hard hit, with many falling together despite no apparent deterioration in company fundamentals.

"One of the things I try to teach on this show is how much stocks can diverge from the underlying value of the companies," Cramer said.

Cramer suspects Friday's sell-off may have been intensified by a hedge fund liquidation, similar to the collapse of highly leveraged fund Situational Awareness earlier this summer. While another liquidation has not been confirmed, such events can force funds to unload stocks to cover losses, dragging down shares regardless of whether the companies are in trouble.

For investors, the lesson is to distinguish between a stock falling because its business is weakening and one declining because of forces beyond the company's control.