Sneak Preview: Look Out for Downturns

Spot them outside the business cycle with help from Cramer's new book.
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Editor's note: This is a special excerpt from Jim Cramer's book,

Jim Cramer's Mad Money: Watch TV, Get Rich

. To order your copy and read all the rules, click here.

9. Know how to spot downturns in cycles other than the business cycle.

I've told you how to spot good cycles like the strength in the aerospace cycle, and I've told you how to examine the business cycle in order to figure out which sectors should be in favor. But I haven't told you how to spot a bad cycle and get out of everything levered to it.

It goes without saying that when you catch a stock that's levered to a cycle that's about to start trending downward, you should sell the thing. But how do you know that a cycle like the technology gadget cycle or the telecommunications equipment cycle has started to go bad?

The good news for you is that you have a lot of time. It can take three months for the Street to appreciate fully that a good cycle has turned bad, and as long as you're doing the homework and following the right indicators, you can get out too.

What are the right indicators? Just follow the money. If new orders for airplanes start to decline, guess what -- the aerospace cycle is running out of steam. If you own

Boeing

(BA) - Get Report

, by the time you learn that those new orders are declining, the stock will already have come down a little. Don't worry, you still have time to get out. It'll go down a whole lot more if the cycle is really slowing.

The best example of this on Mad Money has been my treatment of

Lucent

(LU)

, a stock I once liked but hated consistently throughout the end of 2005 and 2006. Lucent makes telecommunications equipment, so it's about as levered as a company can be to the telco equipment cycle. From its peak in April 2006 at more than $3, to its latest trough in July and August at slightly more than $2, I was telling you to sell. There were a lot of reasons to hate Lucent, but the thing that really killed the stock, the thing you could have caught, was the slowing of the telco equipment cycle.

How could you know this cycle was slowing down before the Street figured it out? You had to be looking for things that tend to slow, or stop, telco spending entirely. You have to look at the phone companies, because they're the guys who spend the money; they buy the telco equipment. In 2006 there were two things that pretty much stopped telco spending dead in its tracks, and at least with the first one, you could have predicted what would happen before the Street did.

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Editor's note: This is one of Jim Cramer's 10 Lessons From Success: Some Buy and Sell Rules, a special excerpt from his newest book,

Jim Cramer's Mad Money: Watch TV, Get Rich

, in stores now. Check back tomorrow for a new lesson.

From Jim Cramer's Mad Money by Jim Cramer. Copyright 2006 by Jim Cramer. Reprinted by permission of Simon & Schuster, Inc.

At the time of publication, Cramer had no positions in any of the stocks mentioned in this excerpt.

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for

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