Game Plan: Be Cautious, Take Profits

The Dow pulled back 122 points on Friday, cutting short a significant two-week rally. That pause in upward momentum is legit, Cramer said, and he pointed to signs that we could see more declines next week. Investors then should consider taking some money off the table, if only to lock in the gains they have already earned.

Cramer first looked to Standard & Poor’s propriety oscillator, which measures how overbought and oversold the market it is at any point in time. Oversold sold means sellers have pushed the market down too far, too fast, while overbought means the market is unnaturally high. When either scenario happens, stocks usually snap back in the opposite direction.

Well, right now we’re overbought, the oscillator is saying. That was the reading this morning as well, before the Dow lost over 100 points, and the toll says we’re not done yet. Cramer trusts the oscillator, and that’s one reason he wanted investors to take profits, even after today’s decline. Better to pocket the cash you’ve earned before even more is lost.

No doubt there’s reason to feel good about the market’s most recent moves. But investors shouldn’t lose sight from whence we’ve come. For a long time, we suffered loss after loss, and that experience still weighs heavy on Wall Street. That’s why a stock such as FedEx, which was up huge Thursday despite reporting a terrible quarter, gave those gains back today. Nucor, too, started the week with bad news, guiding for a first-quarter loss rather than a profit, and this stock pulled back as well. The only difference is that Nucor didn’t fall as far as FedEx. So NUE shareholders should cash out before negative sentiment brings the stock even lower.

Nucor and FedEx may have signaled buy when prices were low, but Cramer urged viewers to be extra vigilant in not paying up. He needs more positive news beyond we’ve already heard from Corning, Taiwan Semiconductor and Xilinx , as well as oil, copper and other minerals. The key indicator for Cramer is reduced earnings estimates. Without those companies can’t deliver the upside surprises that push stocks higher.

Here’s another big worry of Cramer’s right now: The populist, anti-AIG bonus rhetoric coming out of Washington. Banks are at the heart of any market rally, so the Obama administration needs to be extra careful not to hurt them for the sake of politics. After all, the banks were a big driver in the gains we’ve seen over these past two weeks. If this sector again becomes the enemy, expect more down days like today.

Lastly, a lot of people are worried about inflation. Cramer isn’t. He sees it as a good thing right now. But he advised people to let that worry clear before getting back into the market.

So be cautious, Cramer said, and take profits. Pocket your winnings while you can.

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