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Three Rules for Spotting Market Tops

Monday, 24 Dec 2007 | 2:22 PM ET

Accounting irregularities equal sell. It’s that simple, Cramer said. Don’t think – just sell. It’s not just that lying about numbers is illegal, it’s that companies that have to lie can’t make their numbers. Sometimes this isn't the case, but more often than not it is.

Spotting Tops (pt.1)
Mad Money host Jim Cramer tells you how to spot a top

And, no, options backdating is not an accounting problem, Cramer said. It’s a compensation problem. But companies that backdate options for their officers don’t do it because business is bad, they do it because business is good. Those executives would rather take stock than cash. If anything, options backdating can be a reason to buy a stock, not sell one, he said.

Home Gamers should also watch for overexpansion. The Street loves growth, and often that comes in the form of acquisitions and rapid expansion. But Cramer said that sometimes this is also a sign you should get out. The same goes for frenetic store openings or office expansions. Watch for the code phrase: integration problems. When investors hear those words, they should run for the exits.

Spotting Tops (pt.2)
Mad Money host Jim Cramer tells you how to spot a top

Overexpansion is easy to spot in retail, too, Cramer said. A growing store count is great, but when it's up big relative to a retailer’s base, that’s a sign of weakness and not strength. And when a retailer has a presence in all 50 states, that’s a top. They’ve run out of room to grow, and no growth means the stock is about to take a long slide down, Cramer said.

The last sign of an impending top is government intervention. The government, at the federal or state level, can do more to hurt a company than any competitor. Be sure to read the big newspapers – The New York Times, Wall Street Journal, USA Today, Washington Post – and don’t just stick with the business section because it never pays enough attention to Washington, Cramer said.

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