This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Cramer's 'Mad Money' Recap: Methods to My Madness

Stocks in this article: CMGISRGHANS

Cramer said executives can sell company stock for all sorts of reasons. But buying, especially in large quantities, should be a clear signal that execs are highly confident in their outlook and are putting their own money on the line to prove it.

This is especially true of stocks at or near the 52-week high list, said Cramer. If a stock is already at sky-high valuations, and insiders are still buying, that is a powerful endorsement. There is nothing more telling than when an insider backs up the truck for his own stock when its sitting at a high.

Avoid paying too much attention to small, token purchases, Cramer cautioned. Look for only large, meaningful insider purchases. Sometimes execs want to make it look like they have confidence in their stocks. But when they actually do have conviction, that's the time to follow their lead.

Short Interest

Continuing on the insider buying theme, Cramer's next trick is to look for a special type of insider buying, one that involves a stock with a huge short interest.

Cramer explained that short-sellers must have a lot of conviction in order to bet that a stock is heading lower. The downside of shorting a stock is infinite, while going long on a stock limits losses at zero. Short-sellers also risk a short squeeze, a bit of good news about a company that sends shares high enough that those short the stock are forced to cover their positions.

The dynamics of short-selling makes insider buying all the more interesting, said Cramer. When lots of people are betting against a company and an executive starts buying, Cramer said that's like drawing a line in the sand and saying, "Our stock goes this low and no lower."

Cramer said any time investors see a large short interest coupled with meaningful, not token, insider buying, they should perk up and start the research immediately. While short-sellers are smart people, they often know less than those in charge of running the company, noted Cramer.

Cramer offered a caveat to betting against the short-sellers, however: Avoid hot-button stocks where the short interest is simply too large to overcome. At the height of the financial crisis in 2008, Cramer noted that short-sellers were able to overrun many bank stocks, thanks in part to the removal of protections like the uptick rule, which helped to slow these so-called "bear raids."

2 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,195.42 +221.11 1.30%
S&P 500 0.00 -2.75 -0.14%
NASDAQ 4,566.1380 +16.9120 0.37%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs