Cramer's 'Mad Money Recap': Play by the Rules

Stocks that are heavily shorted and heavily hyped are "dangerous," and people should think of them as "a war with two sides," he said. While on one side there are analysts who love the stock and talk it up, on the other side there are people betting a lot of money that the stock will go down.

"You don't do something as risky as shorting a stock unless you're a well-educated investor who has done his or her homework on the thing," Cramer said.

"So when all the analysts are having their lovefest with the stock, and you have an army of shorts sitting on the sidelines, you should see a red flag."

This almost always means there's some negative piece of information concerning the stock that the company and analysts are not talking about, he said. It's not inside information, but it's information that the bulls would be more comfortable ignoring.

Cramer said what happened with NutriSystem (NTRI Quote) provides an example of what can happen with a heavily hyped stocked that's loved by analysts love but also has a huge short interest.

It turns out the company had a "big problem" with its distribution model, information that was not emphasized, but which the shorts knew about.

Cramer's fifth and final rule states that "past performance is not indicative of future success." In other words, if people have made a lot of money playing a particular trend, or by investing in a "hot industry," then their natural instinct might be to keep finding new ways to play that trend, Cramer said.