The first new rule has to do with the business cycle – the cycle of peaks and dips the economy goes through. When there’s fast GDP growth, we’re near the top of the cycle. When GDP growth slows, we’re headed to the bottom. There are certain stocks that do well with a strong economy and certain ones that prosper in a weak economy. For instance, when the economy is chugging along, it makes sense to buy big industrial stocks: companies that make machinery, cars and minerals, for instance. But when the economy weakens, you have to dump those cyclical stocks and get into secular growth stocks like healthcare, food and drink and consumer staples – essentially, products people still need even when the economy is weak. Procter and Gamble

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[PG  Loading...      ()   ] is probably the best example of this kind of company, Cramer says. Nobody stops buying toothpaste just because the economy is slowing down.

Cramer's not just advising you to play the cycle. What he’s really saying is that you shouldn’t fight it. You shouldn’t own cyclical stocks when the economy stinks and you should stay away from the consumer staples when the economy is stronger. This is an absolute rule, Cramer says. It doesn’t matter how good the stock is, how clean its fundamentals are – if it doesn’t fit into the cycle, it could lose you money. In the end, sadly, it doesn’t matter what you think. What drives a stock is what the money managers think, and the money managers obey the cycle.

We like to believe that stocks trade exclusively based on things like earnings, but it’s just not true. The cycle is almost everything. If you try and own a cyclical stock in a weak economy or a defensive stock in a strong economy, chances are you’re going to get hurt, Cramer says. If you love the stock and the cycle is turning, sell it and wait. A cycle, by its very definition, is a rotation, and chances are you’ll be able to buy your stock back when the cycle turns in your favor again. Better to pay some extra commission fees than take a big hit to your portfolio.

Bottom Line: Don’t own stocks when the business cycle puts them out of favor with Wall Street, because those stocks will almost always go down – even if they don’t deserve to.

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