Cramer's 'Mad Money' Recap: Rally Rules

Search Jim Cramer's "Mad Money" trading recommendations using our exclusive "Mad Money" Stock Screener.


NEW YORK ( TheStreet) -- There's nothing worse than watching the averages roar higher while your portfolio just sits there, Jim Cramer told "Mad Money" viewers as he devoted his entire show to teaching investors how to best take advantage of short-term rallies.

Cramer said the most important lesson in dealing with big market moves is preparing for the future and not letting great opportunities to sell pass you by. He said just as investors can't give in to despair when the market plunges, they also can't get blinded by euphoria when things are going well. "You don't actually have a profit until you sell something," Cramer reminded viewers. You aren't making money until you "ring the register." That's why selling into strength is always the best policy.

There's nothing wrong with feeling good about a rally, as long as it doesn't lead to complacency -- the enemy of every investor. You can be thrilled about your portfolio's performance, said Cramer, but don't forget that you've also been given a chance to sell at great prices. Remember the goal of investing: buy low and sell high.

Take a Hard Look

Cramer's next rule for investors was to always scrutinize your portfolio hard during big market rallies. The only time investors need to be tougher on their portfolios is during brutal market declines.

Cramer said it's only natural to fall in love with a stock that's making you a lot of money. But in the end, you can love your spouse, you can love your kids, you can love your dog and maybe even your job, but you should never love a piece of paper, especially if its value is heading higher. When a stock is making you money, you tend to love it more, but actually you should be liking it less. The more expensive it gets, the riskier it gets and the more likely it is to fall.

That's why investors should re-rank all of the stocks in their portfolios during big rallies, taking into account the risk/reward they now offer. Stocks you bought low and still represent great value? They should be ranked highest. Those with big gains should be ranked progressively lower. Emotionally, this may seem counter-intuitive, said Cramer, but in a rally where everyone is buying like crazy, the smart money should be ringing the register on their biggest gains.

Cramer said that at his charitable trust, Action Alerts PLUS , he ranks stocks on a scale of one to four. Ones, he said, are stocks he'd buy at the current price, twos are buys only if they pulled back, threes are stocks you'd sell at a higher price and fours are those you should be selling right now.

Prepare for Down Days

A short-term rally is your best opportunity to prepare for the next big down day, Cramer said in his next lesson for investors. He said preparation is the key to successful investing, which is why you should have a plan for selling every stock you own, preferably before you even buy it in the first place.

Cramer said his rally playbook is really a prologue to his sell-off playbook. You can't afford to buy stocks on the big down days if you don't first ring the register on your biggest gains during the rallies. Cash is king, Cramer reminded viewers, which is why he always kept at least 5% of his portfolio in cash back at his old hedge fund. He said he was always scaling out of the winners so there was always cash on hand to have the ammo needed for the next down days.

The best time to raise cash is right after a big rally, when there's cash to be made, Cramer concluded.

What Should You Sell?

So which stocks should investors sell during the big market rallies? Cramer said there are two kinds: the biggest winners, which he already mentioned, and the laggards that you've probably been wanting to sell anyway.

Cramer continued that investors must remember that when talking about stocks, price matters. That doesn't mean you should sell all of your big gainers, but you should certainly trim your positions. This may seem crazy, he said, but in reality it makes a lot of sense.

As for the laggards, it's always a good idea to look into the stocks in your portfolio that haven't moved with the rest of the markets and then ask why. If your stock can't gain any lift on even a big up day, there may be a bigger problem that needs to be addressed pronto.

Not all laggards are losers, Cramer said. Iit might not be the company's fault that some macro issue is holding the stock back. The fact is, however, that we don't care about blame, we care about winning, Cramer said. If your stocks aren't winning during a major rally, you may want to think twice about owning them.

Too Much Money

Cramer's next tip for investors was a little different from the rest because it was about the dangers of making too much money.

Cramer explained that market rallies give investors opportunities to see how their portfolios compare to the overall market. If your portfolio doesn't perform as well as the broader averages, that's relatively easy to fix by gaining more exposure to the sectors that are working. But if your portfolio wildly outperforms the averages, that's a red flag that you've taken on far too much risk.

Watching how your stocks move during a rally is an excellent way to tell if you've taken unnecessary risks, he said. If your stocks leave the averages in the dust, it's prudent to ask why and make some changes before those high fliers leave you in the rubble during the next big sell off. Diversification -- not keeping all your eggs in one basket -- is still one of the best investing tips that a TV host like Cramer can give.

Holding Your Cash

Cramer's final rule for investors: When raising cash is essential, spending it is absolutely prohibited. He said that after a big one-day move in the markets, many investors are tempted to buy, buy, buy in anticipation of day two being just as good. But Cramer's rule has always been to "never buy stocks after the market has just spiked."

Don't chase, Cramer said. Just acknowledge that you may have missed the move and wait for a cheaper price. It's easy to get swept up in the euphoria, but waiting is the smartest thing you can do and it will save you a lot of pain, he concluded.

To watch replays of Cramer's video segments, visit the Mad Money page on CNBC.

-- Written by Scott Rutt in Washington, D.C.

To email Scott about this article, click here: Scott Rutt

Follow Scott on Twitter @ScottRutt or get updates on Facebook, ScottRuttDC
At the time of publication, Cramer's Action Alerts PLUS had no position in stocks mentioned.

Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for TheStreet.com, Inc., and CNBC, and a director and co-founder of TheStreet.com. All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of TheStreet.com or its affiliates, or CNBC, NBC Universal or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither TheStreet.com, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or TheStreet.com is related to the specific opinions expressed by him on "Mad Money."

None of the information contained in "Mad Money" constitutes a recommendation by Mr. Cramer, TheStreet.com or CNBC that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You must make your own independent decisions regarding any security, portfolio of securities, transaction, or investment strategy mentioned on the program. Mr. Cramer's past results are not necessarily indicative of future performance. Neither Mr. Cramer, nor TheStreet.com, nor CNBC guarantees any specific outcome or profit, and you should be aware of the real risk of loss in following any strategy or investments discussed on the program. The strategy or investments discussed may fluctuate in price or value and you may get back less than you invested. Before acting on any information contained in the program, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.

Some of the stocks mentioned by Mr. Cramer on "Mad Money" are held in Mr. Cramer's Action Alerts PLUS Portfolio. When that is the case, appropriate disclosure is made on the program and in the "Mad Money" recap available on TheStreet.com. The Action Alerts PLUS Portfolio contains all of Mr. Cramer's personal investments in publicly-traded equity securities only, and does not include any mutual fund holdings or other institutionally managed assets, private equity investments, or his holdings in TheStreet.com, Inc. Since March 2005, the Action Alerts PLUS Portfolio has been held by a Trust, the realized profits from which have been pledged to charity. Mr. Cramer retains full investment discretion with respect to all securities contained in the Trust. Mr. Cramer is subject to certain trading restrictions, and must hold all securities in the Action Alerts PLUS Portfolio for at least one month, and is not permitted to buy or sell any security he has spoken about on television or on his radio program for five days following the broadcast.