Cramer's Mad Money - Bottom Fishing (9/1/09)

Includes: DIA, QQQ, SPY
by: Miriam Metzinger

Note:The following Mad Money Program is a rebroadcast of a show which first appeared on March 19, 2007.

Stocks discussed in the in-depth session of Jim Cramer's Mad Money program, Tuesday September 1.

Hitting Bottom

Cramer dedicated Tuesday's show to the art of finding tops and bottoms in the market and anticipating big moves. A stock is at bottom when it has hit its lowest point and is ready to start going up again. “If you call them correctly, you can stand to make a small -- actually not so small – fortune,” said Cramer.

Looking at charts is not enough, investors also need to examine a company’s fundamentals because "sometimes a stock that goes into free fall is only taking a breather before sprinting towards zero." Cramer adds earning reports are never responsible for a bottom, and if too many people predict them, they won’t happen.

Bottoms also rarely happen in one fell swoop, but may be comprised of gradual declines over several days. Cramer suggested looking for three things that indicate a bottom: bad market sentiment, mutual funds pulling out and creating a “crescendo selloff,” and catalysts such as the subprime crisis or Fed rate hikes. "Understand, the market hates nothing more than uncertainty,” said Cramer.

As Good as it Gets

While many people don’t like to find tops in their favorite stocks, it is necessary to be honest and to “avoid some serious pain,” since every stock reaches a point where it won’t go higher. A sign to sell may occur when a momentum stock has had a big jump, the bears have returned to the forest and analysts are upgrading; “everyone who wants the stock owns it, and that means the buying will stop soon.”

Cramer also advised looking out for competition by paying attention to what is going on throughout the sector. Although this means more homework, it is worth it because; "I'd say a solid 70% of the tops I've seen were caused by competition,” said Cramer. Another crucial time to sell is when a company has accounting irregularities, but not necessarily options backdating issues, since companies which backdate options do so when “business is good.”

Overexpansion is another sign a stock has reached his peak, since acquisitions may be difficult to execute. “The code for overexpansion on the Street is integration problems," Cramer said. "When you hear management say those two not-so-magic words, you know a top is coming ... and it's time to run for the exits." Cramer says government action can affect a stock more than competition, so investors should read or watch the news. Finally, sector rotation has a huge impact, and at the top of a cycle that is heading down, one should buy secular stocks, and when the market is at bottom, there is buying opportunity for cyclicals.

Earnings Savvy

A valuable skill for investors is predicting what earnings are going to do "It's hard to do, and it is time consuming, but, man, does it pay off,” said Cramer. One way is by looking at purchases in stores; “When something is flying off the shelves at a pace that isn't reflected by the earnings estimates, buy the stock of whoever makes it.” Another strategy is to look at spending cycles. For instance, when Boeing is getting a lot of orders, it makes sense to buy stocks in its suppliers. "You watch the indicators, you stay disciplined, the rest of the market will follow you; and that's the situation you want to be in,” Cramer said.


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