Cramer's Mad Money - All About Bull Markets (11/25/09)

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Includes: DIA, QQQ, SPY
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Wednesday November 25.

Editor's Note: Wednesday's program was a repeat of a Mad Money episode that last aired on September 2, 2009.

Follow the Leader

Cramer devoted Wednesday's program to discussing characteristics of bull markets and how to trade them. His first instruction is to follow the leader; every bull market has leading stocks and sectors that guide rallies and selloffs. How do investors identify leaders? The first stocks to rally from a bottom are likely to be leaders, and they tend to trade in a "V" formation. They are also the first stocks to get hit on a selloff.

Buy on Declines

If a decline is caused merely by investors' panic over a minor piece of news that doesn't relate to a stock's fundamentals, Cramer would use these declines as opportunities to buy leading stocks on the cheap. It is important to be able to look beyond the headlines and the hype to see that a bull market correction is an opportunity and not a reason to lose hope.

Watch out for Fund Managers

The fate of stocks, particularly market leaders, are often determined at least as much, if not more, by the behavior of fund managers as by fundamentals. Fund managers can often dramatically drive up the price of stocks by "panic buying." If they were underinvested, on the sidelines or short, and they see the market headed up, they might pile in at once and buy, especially when a rally hits 10%.

Breadth or Circuses

Indexes like the S&P 500 and Dow Jones only tell part of the story; investors need to look for breadth in rallies if they want the whole truth. A 'thin" rally is led by only a few stocks or a couple of sectors and does not give an accurate picture of the market as a whole. The rally in the summer of 2007 before the long period of decline was led only by commodities and was thin; it didn't accurately represent what was really going on in the market. While the spring of 2009 rally looked thin at first glance, since it was led only by semiconductors, banks and oils, the rally continued and spread out to reach other sectors until it became a broad market rally and accurately signaled better times.

Technical Difficulties

While technical indicators such as oscillators and put/call ratios can indicate the direction of stocks in normal markets, in unusual times like the crash and sustained rally of 2008-09, these devices can cause investors to lose money. Technicals often tell investors when a stock "cannot" go lower or go higher, but in the decline of 2008, stocks kept dropping lower and lower. If investors paid too much attention to technical data in the spring of 2009 and sold in April, they missed the huge gains that followed. In short, in unusual markets, don't depend on technicals.

Bull Market, Meet the Matador

Every bull market must come to an end, but what are the most common bull market killers? Cramer said inflation is the "serial killer of bull markets." As long as the Federal Reserve keeps interest rates low and is trying to prevent inflation, the bull market can continue, but once the Fed starts tightening, watch out.

Super-extreme valuations also indicate that the best is over. Once fundamentals are brushed aside in valuing a stock and companies are measured by their page views or takeover values, investors should run for cover.

No bull market can last with sustained unemployment over 10%, according to Cramer. While "streamlining" by getting rid of employees can bring a company short-term gains, the macro situation will decline if many companies rely on reducing jobs as a regular cost-cutting measure.

Finally, the decline of leading stocks or sectors will bring the bull market down as well. If the market became a bull on the shoulders of a specific sector, it is likely to become a bear as the sector falls.

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