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Editor's note: The following is a recap of a "Mad Money" episode that originally aired March 19, 2007.
"Tonight's all about staying one step ahead of the game," Jim Cramer told viewers of his "Mad Money" TV show. "If you can spot a big move in a stock or the whole market before it happens, you're made in the shade."
If there's one thing Cramer's done well during his career on Wall Street, it's spotting bottoms, he said.
There are no specific techniques, formulas or hard-and-fast rules for spotting a bottom, which is when a stock hits its low point and is ready to move higher. Nor do real bottoms come around often, he said, but when they do, "if you call them correctly, you can stand to make a small -- actually not so small -- fortune."
While a lot of people rely on pure technical analysis and look at charts to spot a bottom, a chart is not enough, he said. People need to consider the fundamentals, too, because "sometimes a stock that goes into free fall is only taking a breather before sprinting towards zero."
Cramer said he's also never seen a stock bottom out based on earnings reports. "The thing about a bottom is that if too many people see it coming, it won't happen," he said.
Another "crucial" fact about bottoms is that they rarely happen all at once, Cramer continued. While not always the case, usually the market bottoms in thirds and sector by sector over a period of days, he said.
Market players should see three things when looking for a bottom. First, "market sentiment must be bad," Cramer said. "When the malaise reaches all the way up there, that's a terrific indicator that we're nearing a bottom."
Second, investors should look out for mutual funds pulling out of the market in a "significant way," he said. "To correctly spot a bottom, you need to be right when almost everybody else in the market is wrong," Cramer explained. When the mutual funds give up, you get a massive "crescendo selloff," which is "one of those rare times when the market bottoms all at once, not in thirds."
Finally, big bottoms usually have a catalyst, such as a subprime lending crisis or a
rate hike, when the market sentiment is already in the gutter, he went on to say.
"Understand, the market hates nothing more than uncertainty," Cramer said. In the 24 hours leading up to both of the wars in Iraq, he said, he managed to catch great bottoms because investors couldn't handle the total lack of certainty.