Mad Money

Cramer reveals major sell signal for otherwise hot stock

Caught up in the momentum?
Caught up in the momentum?

(Click here for video linked to a searchable transcript of this Mad Money segment)

They're called momentum or momo stocks on Wall Street. Jim Cramer says they can make you a lot of money, but only if you know when to get out.

By momentum stock Cramer means "hot speculative stocks of companies with relatively low market capitalizations."

Now, make no mistake - these stocks are the proverbial deep end of the pool. That is, if you sell too late you'll be the one who gets stuck with a loss," Cramer said. "However, if you sell to soon, you'll miss out on making a great deal of money – and few things are more frustrating than watching a stock you've once held advance by double or even triple digits."

Like all areas of investing, Cramer says the trick is to approach these stocks with discipline. "I'd be afraid to buy them too if I didn't have a discipline that let me know when to get out," Cramer said.

Here's how Cramer does it.

Adam Jeffery | CNBC

"Usually these stocks begin with very little research coverage from the major Wall Street brokerage houses," Cramer said. That's important because Cramer thinks the sell signal comes from an increase in analyst coverage.

"You have to use your own judgment here, but a good rule of thumb is that once a hot stock, that had little coverage, has at least a half dozen analysts covering it, the run is going to begin to peter out."

Although that may sound counter-intuitive, Cramer said don't take increased coverage as a sign the Street is getting behind a stock.

Instead, he says take it to mean the Street has come late to the game. "Historically, that's what it's been."

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Therefore, "When I see a hot stock that had little or no research coverage attract 6 or more analysts, I sell," Cramer revealed. "It says to me that just about everyone who wants a piece of the stock has a piece of it."

It's not scientific, Cramer admits, "But this formula has worked for me for as long as I can remember. And if you're going to play momentum, you have to know when it's time to leave the table."

Call Cramer: 1-800-743-CNBC

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