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Jim Cramer offered some of his rally rules on his "Mad Money" TV show Friday.
One of those rally rules is a simple one: Use the rally as an opportunity to build up your cash supply.
"Use the rally to stockpile everything we need in case things get bad," Cramer said. "It's called cash. Plain old cash is probably the single most important thing in your portfolio.
"Cash, my friends, is what makes everything else possible," he said. "Never less than 5%; try to get up to 10%.
"The best time to raise cash is right after a rally. Whatever you sell to raise cash, you'll get a much better deal after the rally. ... I believe it's essential to raise cash. ... Not selling something to raise cash when the market makes it easy for you? That is reckless ... that is asking for a train wreck."
Cramer says that a "rally is your best opportunity to protect yourself from the downside. You'll get the most mileage out of preparing for the worst days on the best days."
Two more of Cramer's rally rules are: Sell your big winners and sell your momentum stocks.
"Selling your winners into a rally makes a lot of sense," Cramer said. ... "We don't want anyone to be overwhelmed by one position.
"Since you need to stay diversified, you need to trim these just to keep them from dwarfing your other positions. No one ever lost a profit by taking a profit. ... Just cut back on the number of shares. ... With big winners, you don't have to take everything off the table. When the rally ends, they're gonna lose their momentum."
Cramer said that "momentum stocks often are more risky than other stocks."
Cramer added that "making too much money
during a rally can be a problem. The warning is very simple. You're taking on way too much risk. Taking unnecessary risk in your portfolio makes absolutely no sense. ... If we get a 1% gain and your stocks are up 2%, you're in trouble."
Cramer also says you should use a rally to pare your losers.
"If you own a stock that went down during the rally, you need to sell it," he said. "Go buy a nice sweater." Stocks that falter during a rally are "a sign that something is very, very wrong with them," Cramer said. It's "usually a macro problem. Bottom line, sell your big winners, your momentum names and your losers."
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