Cramer: Trump's tariff delay short squeezed stocks to spark a rally

President Donald Trump‘s move to delay a new round of tariffs on some Chinese imports fooled the bears and triggered a short squeeze to spark a market rally, CNBC’s Jim Cramer said Tuesday.

A “stock market sensitive” Trump played a hand to stop the market from continuing a downward swing with the 2020 election on the horizon, the “Mad Money” host said.

One day after the Dow Jones Industrial Average plummeted 391 points, the index bounced back more than 372 points on news that planned tariffs on some Chinese products would be delayed to Dec. 15.

“The next time you’re terrified that everything is falling apart and the stock market’s about to roll over, remember that we have a pro stock market president who’s willing to take action to turn around the averages,” Cramer said. “Maybe that’s unfair to the bears, but it’s fabulous for the bulls.”

Cellphones and clothing are among the list of goods that won’t be subject to a new round of 10% tariffs set to go into effect next month. Wall Street rallied on the news with the S&P 500 jumping 1.48% and the Nasdaq Composite surging nearly 2%. The duties are scheduled to go into effect Sept. 1.

The market fell into pressure after the United States and China volleyed new sanctions on one another that reignited the trade war between the world’s two largest economies. Trump proposed attaching a 10% duty on the remaining $300 billion worth of untouched products, while China announced it would stop all agriculture buys from American farmers.

Cramer said the U.S. president’s reel back creates an opening for China to reverse that plan.

“I think it was a genuine olive branch, something that allows the Chinese government to save face [and] start buying some American ag products,” he said. “They need to buy some pork. They desperately need it because of a particular kind of swine flu that’s proving very difficult to eradicate.”

The tariff stall also gives companies that were under threat more time to move production out of the country, Cramer said. Some American businesses have responded to the prolonged trade war over the past year by shifting operations to countries in the region like Vietnam and India to avoid 25% tariffs already in place.

Trump, who has demanded lower interest rates, also has the Federal Reserve in mind, Cramer said. Trump railed against Chairman Jerome Powell for not taking more aggressive action in cutting the benchmark interest rate beyond 25 basis points nearly two weeks ago.

“It gives President Trump cover to strongarm … Fed Chief Jay Powell … into cutting interest rates more aggressively. Tariffs are inflationary,” Cramer said. “Now Trump can use this delay to show Powell … that there’s no real inflation, which will give the Fed more leeway to cut rates. Look for some tweets saying that.”

Wall Street rebounded from its Monday avalanche in part because of the short squeeze, which is where investors who bet on the market to fall have to close their bets to avoid losing money. That creates more demand than supply, which shoots stock prices higher.

“Put it all together … you got a vicious short squeeze, where everything that was hated is now loved and everything that was loved is now disliked,” Cramer said, and “the stocks that benefit from this stay of execution were big enough to help lift the whole S&P 500.”

Cramer said things could get worse for the bears as China deals with a slowing economy and tensions in Hong Kong. Pro-democracy protesters at Hong Kong International Airport caused interrupted flights there for the second day in a row.

“I’m betting the Chinese will give in, at least on agriculture, and do some buying,” Cramer said. “There’s ample opportunity here seeing as there are a bunch of calls scheduled between both sides.”

WATCH: Cramer opines on Trump’s tariff pullback

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