3 Rules for Spotting Market Tops
Cramer on Tuesday offered viewers five key tells that a stock or market was topping, and they all involved doing homework. Whether it's researching the industry analysts or the sector competition, investors should constantly monitor their holdings. What else should they look for?
"If you want to stop a top and get out before it happens," Cramer said, "watch for accounting irregulatiries, overexpansion and government intervention."
Accounting irregularities equal sell. Don’t think, the Mad Money host said, 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.
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.
Investors should also watch for overexpansion. Wall Street loves growth, and often that comes in the form of acquisitions and rapid expansion. But sometimes this is also a sign you should get out, Cramer said. 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.
Overexpansion is easy to spot in retail, too, Cramer said. A growing store count is great, but it's a sign of weakness when it's up big relative to a retailer’s base. 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.
"It never pays enough attention to Washington," Cramer said.
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