If a Stock Hits a New High, Watch for a Pullback
Often times, Cramer finds stocks with upside potential by watching the new high list. There are only a few reasons why a stock might hit a new high, he explained. It could be part of a bull market, for example, or the underlying company may have “serious momentum.” Either way, Cramer said many stocks on the new high list tend to push higher. That’s not an excuse to buy just any stock on the new high list, though. Instead, Cramer recommends waiting for a pullback.
“The pullback gives you a good, lower priced entry point in a stock that's probably has a lot of positives going for it,” Cramer said, adding he doesn’t want investors to chase momentum. “You should always be conscious of price and therefore try to buy on weakness, just like you want to sell into strength.”
If a stock has pulled back from the new high list, Cramer only recommends buying if you are confident it can make a comeback for substantive reasons not having to do with the market. Sometimes stocks fall for good reason, so he reminds investors to know the difference between a broken stock and broken company. If the fundamentals haven’t changed, the stock probably fell for mechanical reasons, such as profit taking or panic in the overall market.
“While it isn’t a hard-and-fast rule, I tend to like stocks that have pulled back between 5 and 8 percent from the high. That’s the optimal level of a pullback,” Cramer said. “Less than that, you are probably too early. More than that and maybe something is indeed very wrong with the stock and you just don’t know it.”
As with any investment decision, though, Cramer said it’s important to do your homework and get as much information as possible about the underlying company and its stock.