Cramer: Stocks could face pain before powerful Santa Claus rally

• The “Mad Money” host also says PayPal, Disney and Mastercard are among stocks investors should look at in the face of the current sell-off.

Stocks were on course for recovery on Wednesday following poor showings earlier in the week, but ended the day lower after the US confirmed the first case of the new Covid variant Omicron.

The S&P 500 closed 1.2% lower, while the Nasdaq Composite and the Dow Jones Industrial Average fell 2% and 1.3% respectively. The retreat in US stocks also followed similar moves in Europe and Asia, with UK’s FTSE 100 and Japan’s Nikkei declining by about 1%. 

European markets are expected to open lower Thursday, and with the Omicron variant still causing jitters, market observers say stocks could face some short-term pain before seeing a decent rebound at the tail end of December.

CNBC’s Jim Cramer thinks this will be the case, with the technical outlook of the market suggesting as much. The “Mad Money” host says that investors should expect further weaknesses in the stock market over the next one or two weeks. After that, he predicts a Santa Claus rally that could see most stocks recoup recent losses.

Citing technical analysis by Larry Williams, Cramer says expectations of “a powerful rally near the end of the month” are high. However, investors need to be careful as a fresh leg down remains a huge possibility given the Covid situation and overall market sentiment.

Williams’ technical outlook suggests the pain will continue to around 10 December, after which a reversal could occur. The strategist notes that the above scenario is likely to be “bad”. It could get worse with Omicron spreading, even as Moderna CEO Stephane Bancel and Pfizer CEO Albert Bourla recently noted that a vaccine targeted for the variant might take months to be ready.

On the positive side, Cramer says seasonal patterns show a historical run in the second half of December could happen.

Elsewhere, the investor suggests this is the time to buy some of the stocks that have sold off heavily in the past week. He calls it “a buying opportunity,” and that investors might rue if they end up missing out entirely.

He advises that potential buys are Disney, PayPal, Mastercard and casino operator Wynn Resorts.