Cramer's Mad Money - The ABCs of Rallies (8/21/09)

Includes: DIA, QQQ, SPY
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Friday August 21.

Take Profits

What do successful investors do during rallies? "They check their emotions at the door," said Cramer. Too often, it is tempting to get carried away when a stock soars to the stratosphere, but gains are not real gains until they are sold, Cramer reminded his viewers, and it is essential to lock in those gains and to take profits during rallies.

Rate Your Holdings

Not only should investors trim the top off of stocks that have rallied, but they should also think about selling stocks that aren't working. A rally is the time to rethink one's entire portfolio and to "assume everything is guilty until proven innocent." The risk-reward equation gets worse as the stock price rises, so some stocks may not be worth holding anymore.

Cramer devised a one to four rating system for each stock. Investors should give a one to stocks that can be owned at the current price, two are stocks that should be owned at a lower price, three is for stocks that should be sold in a rally and four is the rating for stocks that should be sold at any price. During a rally, stocks may jump to a higher rating along with prices; ones may become twos and twos become threes etc.

Raise Cash

Every portfolio needs some cash, so investors can buy stocks during down days. A rally is an opportune time to sell gains and raise cash to take advantage of down days when good stocks can be bought at a discount.

Avoid Morning after Buying

Many investors get caught up in the euphoria of a rally and make the mistake of buying stocks the day after a rally on the often mistaken notion that the stock will go even higher. Although this may be true in some cases, more often than not, buying the day after a rally occurs because the investor is in denial. It is better just to accept that the move happened and to try again next time.

Two Types of Sells

Two types of stocks that should definitely be sold in rallies are those that have run too much and chronic underperformers. No single stock should comprise more than 20% of a portfolio, no matter how good it is, and investors should be honest with themselves whether a certain stock is worth keeping after a large run. Also, stocks that are so poor they don't make a move in a general rally should be sold unless there is a specific reason for holding on.

Too Good to Be True=Too Much Risk

Cramer warned that huge gains may be a sign that a portfolio carries too much risk, and a rally is a time to evaluate if your portfolio is in the danger zone. Beware of incredible gains, said Cramer, and if a portfolio seems too good to be true, it probably is, and the best thing is to cut back on some of the riskier stocks.


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