A short-term rally is the time to sell a couple of particular kinds of stocks, said Cramer while discussing his “short-term rally playbook” on Wednesday’s Mad Money: the momentum names and the losers.
“Momentum stocks will likely be big winners in a rally,” Cramer said. “These are good stocks you should sell into strength.”
If a stock was purchased at a lower level, Cramer thinks you should take profits while you have them, even though you might want to hold on for more returns. After all, momentum stocks are risky. They are high growth with high price-to-earnings multiples, and any potential gains can quickly vanish if they lose energy.
Selling momentum stocks is also an important part of any investing strategy. Positive performance during the rally means they’ll become a larger part of your portfolio. And because you need to stay diversified, you have to trim “these monster winners” just to keep them from dwarfing your other positions, Cramer said.
Besides, “Even if the stock still has an amazing story,” he said, “nobody ever lost money taking a profit.”
But Cramer added one caveat: Don’t sell every share. In fact, he cautioned against that move.
The other category of stocks to sell when the market rallies is loser stocks.
“If you have a stock that went down during the rally on no news,” Cramer explained, “that stock is … a dud.”
Failure to perform in a rally might not be the fault of the company, but more of a macro problem, meaning there are greater economic factors at work. Most sectors thrive when the markets are booming, but others excel when economies are on the verge of turning up.
“The fact is, we don’t care about blame,” Cramer said. “We care about winning, and stocks that can’t win even in a major rally are stocks that I want you to think twice about owning.”
In addition, sell the stocks you already planned on dumping, Cramer said. If you were thinking of selling before, you can now sell in larger increments thanks to an improved price.
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