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Follow the Leader

Wednesday, 2 Sep 2009 | 6:33 PM ET

For sure, a bull market offers an easier opportunity to make money, Cramer said Wednesday, “but that doesn’t make it a cakewalk.”

Investors still need to know the different elements of a bull market and how to take advantage of them. Whether it’s understanding the importance of stock leadership, the role that money managers play or the power of technical indicators, each piece is crucial to generating better returns. Cramer used today’s Mad Money to explain it all.

Leadership is the most important part of a bull market, he said. Every significant move higher has been driven by a group of sectors, and a select group of stocks within them, that both defined and controlled that move. They also have the ability to predict the bull market’s behavior.

“If you know what the leaders are and understand how they move,” Cramer said, “you don’t get blown out … like so many others at times when you should be buying.”

The leaders are the first sectors to rally off the bottom, and they carry a tremendous amount of momentum once the rally gets going. When other sectors are down, the leaders are up – and usually up big. For instance, the banks, oils and tech names led the Dow higher when it broke out from its early March 2009 lows. These three groups helped to add a couple of thousand much-needed points to the index.

Other stocks and sectors then follow these leaders. The 2009 bottom in Google , Apple and Research In Motion and their resultant rally also boosted the shares of Yahoo! , Intel , Qualcomm and others. The moves in Schlumberger and Transocean gave a green light to Apache , BP and Halliburton . Wells Fargo , holder of many toxic California-based mortgages, bottomed and then investors flooded into Bank of America , JPMorgan Chase and State Street .

Anatomy of a Bull Market
How to make money in this market, with Mad Money host Jim Cramer.

“Leadership’s remarkable,” Cramer said. “The not-so-hot and emerging players take their cue, and the buyers come in bidding them right up.”

Even the leaders aren’t immune from a pullback, though. In fact, these pauses in the action are a natural part of any pullback. First the hottest group dips, then the other leaders, and after that the followers do as well. But the brief rest usually gives way to a continued move higher, so Cramer urged viewers not to cash out. Expect a 5% to 10% pullback before the leaders resume their charge, and use that decline to buy positions in the best names. Often times the first group to take a hit is the first group to recover, though they may need a catalyst to jump-start their move.

“These pullbacks are your best opportunity to get into the strongest, hottest sectors out there,” Cramer said.

Follow this guide for your leadership buying strategy: When the top stocks pullback 5%, buy part of a position. And leave room for them to fall a full 10%. Ease up on the buying as the share prices start to rise again and eventually make it back to even and beyond.

“Watch the leaders in a bull market,” Cramer said, “and don’t be faked out by their shallow pullbacks. These are porterhouse-size buying opportunities, not signs that the bull has run its course.”

Cramer's charitable trust owns Bank of America, BP, JPMorgan Chase and Wells Fargo.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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