Cramer's 'Mad Money' Recap for Aug. 5

Cramer also said investors should refrain from buying stocks the day after a big rally. He said that "rallies make us overly bullish" and that's dangerous. "Just tell yourself that you missed the opportunity and move on," he said.

According to Cramer, the market will invariably retreat after big moves and only then is it a good time to buy.

What to Drop

Cramer mentioned two types of stocks that he says must be sold into a rally. The first are stocks that have already had great runs. These stocks, Cramer said, may have been attractive at lower prices, but become increasingly less attractive at higher prices.

He reminded viewers that big momentum names also need to be periodically trimmed to remain diversified. He said that no stock should account for more than 20% of a portfolio and even the successful stocks need to be sold.

The second class of stocks that should be sold into a rally are the losers. He said stocks that don't perform well during a market rally often have underlying issues. "Stocks that don't go up aren't ones you want," he said.

A Risky Portfolio

Cramer warned that making too much money during a rally is also a problem. He cautioned that if investors' portfolios are posting huge gains, it probably means that they're taking on too much risk.

Rallies, he said, are the perfect diagnostic tool to assess just how speculative or how risky a portfolio actually is. He suggested that investors use big rallies to examine their portfolios and make adjustments.