Game Plan: Rallies Are for Selling

When investors get a rally like we’ve seen over the past two days, Cramer said, they should take profits – especially considering the volatility in this market.

This rally is more important than any of the news of Washington intervention that’s been crossing the wires during the last 48 hours. Treasury Secretary Hank Paulson’s plan to buy all the toxic mortgages at the center of this crisis and even the Securities and Exchange Commission’s temporary ban on short selling are positive developments, for sure. But for you the investor, this opportunity to cash out of some of your positions trumps everything else.

Normally, during market corrections or downturns, Cramer’s always advised picking through the rubble to find stocks that are down undeservingly. These are the names that lost value only because the market as whole was down. They’re strong companies with strong earnings that most likely will be the first stocks to bounce back. But a rally demands the exact opposite strategy.

For this week’s Game Plan, Cramer asked viewers to spend the weekend reviewing their portfolios and rating their stocks on a scale of one to four. Ones are stocks that you’d buy right now at current prices. Twos are stocks you’d buy on a pullback. Threes are stocks you’d sell into strength. And fours are names you’d sell immediately. Given this rally, Cramer said, at least 20% of your portfolio should be fours.

Even some of Cramer’s favorite stocks are sells right now. Wells Fargo and US Bancorp are both at their 52-week highs, but they’re trading at multiples normally applied to high-growth tech stocks. So Cramer thinks you should sell some of those. The same goes for Zion Bancorp. That stock’s up about 8% just from Friday trading, which means it could be a good time to take profits and move on.

Of course, you want to dump any bank with bad mortgage exposure if it’s up big on this rally. Sure, Paulson’s move will prevent a lot of banks from going under, but as Cramer said these companies’ earnings won’t increase as a result. Not to mention, there’s no telling how long the short-selling ban will last, so you have to get out while you have the chance.

Cramer recommended dumping a natural gas stock as well. Apache was up Friday despite nat gas being down. Tech stocks that seem to be struggling this quarter should probably get cut, too. As should retailers like Target.

As for buying, Cramer said investors should only consider companies with strong earnings that are down. Clorox, which dropped 80 cents today, is a good example. So, too, is Ralcorp.

Cramer’s bottom line: No matter how much you love your stocks, we’re up big on this rally and the responsible thing to do is to sell.

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