i'm jim cramer, and welcome to my world. you need to get in the game! they're going to go out of business. he's nuts! they're nuts! they know nothing!

i always like to say there's a bull market somewhere. "mad money," you can't afford to miss it. hey, i'm cramer, welcome to "mad money," welcome to cramerica, other people want to make friends, i just want to make money. my job is not to entertain you but to educate you so call me at 1-800-743-cnbc. tonight i'm letting you in on something special. the method to my madness. i know this show is the craziest, most random, and frankly most bizarre thing on television. >> no, no, ahhhh! but i also know that you won't find stock advice this good anywhere else. ♪ hallelujah >> house of pleasure. >> you know that too or you would not be watching unless you're the one to tune in to watch to see if tonight's the night i have that heart attack or brain aneurysms on air.

sorry, guys, there's a tape delay. but keep wishing. for those of you more interested in trying to make money than watching me walk around like a crazy man, this show is all about the method, or methods to break from strictly quoting the bar to my madness. how do i pick stocks? that's the question everybody would love to know the answer to. tonight you get a piece of that answer. the truth is i've gotten far too many methods, far too many ways of picking out great stocks to ever cover all of them in one single show. i do want to give you some of the tricks of my trade. think of this show as a, i don't know, how about your tool box. i remember carl giesinger hit me on the head with a hammer

because i was wearing a plastic helmet and i thought it was funny, but my mom said i was -- but you can pick your stocks. at the bottom this show is about educating you, giving you the inside perspective of how the market works and how it can make you money. i'm not here just to dole out the stocks. like a proverbial fish you give a man because you're too lazy to shop. what i'd like to do is empower you and that starts with me teaching you all of the tricks uses to pick out and trade them like a pro, which i used to be. let's get rolling. one of the easiest ways to identify potential cramer names, names we like in cramerica, stocks that could but not necessarily always end up on the show is by watching a sainted group of stocks, a sainted group of stocks called the new high list.

>> moo! >> stocks called the new high list. stocks on that list, the highest of the high, obviously have to have something going for them. either they're part of a major bull market. >> moo. >> -- or the individual stocks themselves have serious momentum. >> buy, buy, buy! >> no matter how they get there, most of the stocks on the new high list keep going higher. that's the thing about the market, it's not that hard to play once you understand that there's more continuity than change. more continuity the stocks go up than change. things keep going the way they were, object in motion. unless something radical changes, they're going to keep going that way. it's you that have to alter your course. but i don't just pluck names off of the new high list because i think, hey, these stocks have been going up, keep going up.

so why don't i recommend them on the show? because that would be lazy and irresponsible. i'm many things. a lot of them negative, but lazy and irresponsible i ain't. i try to make this show the single most rigorous thing in any media venue. i try not to recommend stocks trading off the new high list unless there are some special circumstances. circumstances i'll talk about later in the show. what i like to do when i'm hunting for stocks is wait for something to pull back and drop off the new high list for a minute. this gives you a good lower priced entry point in a stock that's probably going to rebound. >> buy, buy, buy! >> this is great way to identify potential, i stress that word, potential stocks to -- >> buy, buy, buy! >> you only buy stocks that have pulled back from the new high list if you're confident they will make a comeback. you have to do all of the same

homework you ordinarily do before buying a stock. before you pull the trigger, you've got to do this stuff. you must absolutely have conviction, even if it's a cynical conviction that the stock is going higher, that it deserves to go higher. and the biggest caveat of all when you're shopping for stocks that have pulled back from their highs, make sure they haven't pulled back for a good reason. be certain you're dealing with a momentarily damaged stock and not a damaged company that's going down, down, down, down. >> no, no, ahhhh! >> and it's really -- and you don't want to -- >> all aboard! >> how can you tell the difference? if the fundamentals don't change, the stock probably hasn't fallen from grace, it's probably pulled back for

strictly mechanical reasons. profit taking or some across the board panic in the marketplace in general. but if the fundamental picture changes, if whatever made that stock attractive as it climbed its way up to the new high list goes away, then the stock is no longer a candidate. >> don't buy. don't buy. sell, sell, sell. >> the story about the company has to be intact or this method will not help you one bit. if the circumstances change at the company, not the stock. you won't make money. bottom line, that's the first method to cramer's madness. watch for stocks that have pulled back from the new high list. remember, they don't get to that new high list for nothing. they have to be there because the fundamentals are good. some of my best picks on this show, "mad money," have come out of exactly this kind of process. now we're going to take some calls perhaps to verify some of the methods we used here. let's speak to anne in massachusetts. anne? >> caller: hi, jim, i'm ready to learn more about investing.

>> thank you, anne. the show is about teaching. >> caller: listen, when the market has had a good run, all of a sudden investment advisers and business commentators start talking about an inevitable correction. at that point, many investors are close to being fully vested. and what i'm wondering is when should an investor sell some stock in anticipation of that correction? >> okay, i've got the answer, and we call it snitzleing on the show. that's what i call it on the trading desk. as the stock goes higher, we presume correction the whole time. so what we do if we have 100 shares of a stock that keeps going higher and higher, when it's common sense, wow i'm up 30% to 40%, i'm feeling greedy, we take off 25 shares. it goes up again, and now we almost have a double say and it's okay to hold out for that and maybe even 60% to 70%, once again you have to say bulls make

money, bears make money, you take off another 25%, then we get the pullback, and then you can buy it back. we don't wait for the market to tell us what to do. we just choose not to be greedy. we take money off and ultimately we try to play with the house's money, which is what we did a couple years ago with allegheny tech and why we made so much money on ati. can we go to jason, my old home state of pennsylvania? jason? >> caller: cramer, boo-yah! >> fantastic keystone boo-yah back at you. >> caller: listen, my question is about stocks on the 52-week low. what criteria can we use to look for them to indicate a stock is ready to move off of its 52-week low? >> i have talked often with james who runs the stock pickers site, www.stockpickr.com, which is owned by thestreet.com.

our largest shareholder and director. what we say is the new low list is fraught with danger. we need to see two things before we buy up the new low list, we need to see a clean balance sheet, which means it's not going to go bankrupt because it doesn't have a lot of debt, and if i see a lot of debt, forget it. and we need to see insider buying. we see insider buying or a buyback by the company, then we are reassured that it could be the market that's driving it down, not the fundamentals. without those two, frankly, i'm not interested in the new low list. can we go to greg in california, please, greg? >> boo-yah, jimmy. >> boo-yah, greg. >> thanks for taking my call. >> my pleasure. >> a while ago on a stock trading segment with erin burnett, you mentioned that someone was walking up a stock. you said that it's wrong and that it had the added disadvantage of not being legal. >> right. >> what is walking up a stock? >> great question, great question, and it addresses the wonderful and fabulous erin burnett, whose show i'm on.

what happens is that apparently a lot of times - i say apparently because it is difficult to prove -- there'll be institutions that own a lot of a stock and it'll be near the quarter end or year end and they want to make a little quick money. let's say they own xyz stock, i don't even want to dignify it by mentioning a particular stock. they can go in with multiple brokers and eat and buy millions of shares, just say, hey, listen, buy me a million shares of xyz, four or five guys, that all then causes a short squeeze or alternatively just sops up all of the volume, all the sellers, and they can walk it up by continually putting in those buy orders if they have 1 million shares of a stock and it goes up five, they just added 5 million to their performance. why is that illegal? because the sec, the securities and exchange commission of 1934 act specifically forbids the fomenting or manipulation of stocks. that's why you're getting a violation there. the sec's only approved it a couple of times, but it's illegal to manipulate up a

stock. can i go to paul in florida? sunshine, paul. >> caller: boo-yah, jim. >> boo-yah. i'm doing fine, thank you. >> caller: i want to say first of all, i appreciate what you're doing for the average investor. i think it's a great thing. >> thank you, you know what? i would tell the cramer haters and bashers that i'm really not trying to rip off the investors. i'm not trying to get their commissions, i'm not trying to get their money under management, i'm out here trying to do my darn best and if i screw up, which i do often, i whip myself and i boo myself and i am hard on myself. what's up? >> caller: well, listen i've been watching the show for a couple of years. >> good for you, thank you. spread the word around because i'm always ratings challenged because there's another guy calling ratings jihad against me. very powerful. >> caller: so i tried to at least do a cursory homework on every one of your discussion stocks and then i jump in deep to the ones that really interest me and i'm finding one thing that i'm interested about. occasionally you will have a stock that you're paying more than two times earning on.

now it's through further review i find that sometimes those are generally ones with higher dividend yields. so my question is, are there certain metrics that will change your attitude about paying for more than two times growth? >> well, paul, i've got to tell you, if i feel the growth is abnormally low and next year's earnings could explode, in other words, the stock that maybe had a down year or down quarter because of some specific problem, a housing stock that was really decked and the federal reserve subsequently cuts rates and you've got to believe that next year's better, then i will wave my two times growth, otherwise too dangerous, i hear you on the dividend thing, that can stop a stock. it's happened with at&t a couple of years ago, but i hate to violate my rules, there is a method to my madness, and one of the quick tools of the trade, the new high list, they've been anointed, use the market to tell you what to buy and stay with cramer.

do you want "mad money" at your fingertips? now you can get our podcast, show recaps and exclusive content all on your personal web space with the "mad money" widget. try cramer's sound board right from your desktop. grab it today at madwidget.cnbc.com. get your "mad money" text alert today. text mm to 26221 to get cramer right on your phone. for more info, visit madmoney.cnbc.com. or give us a call at 1-800-743-cnbc.

welcome back to the methods to cramer's madness special. tonight i am revealing some of my best tricks for buying and selling stocks. it's something you ask about a lot in e-mail, i try to address it, but tonight's whole show is devoted to it. i guess you can say i'm trying to be like penn and teller.

if that raze natures for this audience. do you know i saw one of the last siegfried shows? i want to pull back the curtain and show you how a professional looks for stocks to buy and knows what stocks to sell. there's no magic, there's no hidden talent, it's all discipline. a bunch of discipline that can make you mad money if you master them. you don't have to be a genius. i'm not a genius. you don't even have to be all that smart, to be completely honest. you just need to know what you're doing and so many people are ignorant of the rules that they are doomed to repeat about what happened in 2000 when they didn't know what to sell. i'm not going to let that happen. see this is where cramer the sad but wise clown comes in. maybe less of a sad clown these days. more like the fool from king leer, something to think about. but on to more important things.

how to make money. earlier i was talking about picking off stocks that have pulled back from the new high list because you get a cheaper entry point in a stock that's a proven winner. i said you didn't necessarily want to buy names right off the new high list because you're paying too much for them. you can usually get a better deal if you're patient, a word that investors hate. patience, probably the word that's made me the most money. sometimes the stock is so hot, sizzling that you just got to buy it whenever you can, as soon as you can, because it's not going lower any time soon. but i've got to tell you in my 25-year trading career, it's not even an exception. it's like an endangered species. i've got one more exception about buying stocks off the new high list too. if you see insiders buying the stock when it's at its 52-week

high, that's a clear sign that you want in. it's a rare thing to see happen, but my experience, it's rare still that this method of picking stocks doesn't work out. i love when i see insiders buying at the high. this is just like a wake up call. it's a gong going off in your head. it's a great sign of their confidence in the business. ask yourself, who knows the business better than the people running it, right? normally insider buying ranges from meaningless to a small but on its own sufficient reason to buy a stock. a lot of times you'll catch insiders buying their stock because they want to give the impression of confidence. frankly what they're doing is creating an illusion that they're doing better than they are, in fact. insiders aren't stupid. they know if they're seen buying their own stocks then the market

will smile upon them -- >> house of pleasure. >> -- so they play the system, they game it. that's fair. but it means we ignore most insider buying because it also could be flimflam, what a word, flimflam. now we're going to get truly colossal insider buying even if it's not at the high, then you want to look at the stock in question. it's a powerful endorsement when the insiders buy a whole lot of stock. it's really the volume of the insider buying that declares the sincerity. we oftentimes see 1,000 shares bought. we need to see volume. but we're only talking about one sort of insider buying right now, buying at the high. there's nothing more arrogant than when an insider backs up the truck for his own stock when it's sitting at a 52-week high. think about what they're saying. we know, we rock. our stock's been infuego, we're confident it is going to keep going higher that we're going to buy some shares, hand over fist,

a naval term, right now. we're not waiting for a pullback. we're buying it at the high. arrogant, sure, but you know what? bankable hubris, corporate insiders aren't fools. and if their stocks are on a 52-week high list, let's assume they know what they're doing. these guys are not going to buy at the high unless they have some unshakable conviction about their companies. why? because buying at the high is reckless and lazy. most investors are smart enough to wait for a pullback before they pull the trigger. insider buying at the high tells me these guys don't even think there'll be a pullback and there is nothing more bullish. >> buy, buy, buy! >> than insiders who believe we can't wait. that's how good the fund these are. the bottom line, one more method to cramer's madness. when you see insider buy in a

stock that's at its 52-week high, you want to be buying too. >> buy, buy, buy! >> hillary in virginia, hillary? >> caller: hi, cramer. >> hey, how you been? >> caller: boo-yah from virginia. >> boo-yah. good to hear from you. what's going on? >> caller: well, i have a question. as a small investor, i feel like there are times when insiders selling or buying seems to move the stock for no obvious reason, and then, a few days later, some major news breaks on the company that affects the stock price. and in some cases, i don't think this is really just a coincidence or aberration, and is there any way we can safeguard ourselves from this and still do well as a small investor and outsider? >> we have to hope that the sec, hillary, is the one that protects us from that. an insider who buys ahead of good news, there was -- there was a decision passed 50 years ago handed down by the supreme court, texas gold sulfur where insiders bought ahead of the

discovery, so-called ahead of the discovery of a huge sulfur mine and they knew about the sulfur mine and they got prosecuted for it. ever since the government has that case to go against insiders. here's the problem, before we get too caught up in that, remember the insiders can flip. there's a law that makes it so that they cannot take advantage of that news even if they had it. you have to wait six months. so the government can prosecute you for taking the short-term profits, short swing profit, they can prosecute you for going out and buying ahead of bad news and selling ahead of bad news. our hope is that the government protects us. we cannot protect us from ourselves, but thank you for the call. let's go to bill in california. bill? >> caller: boo-yah to you, jimbo and a special thanks from the home gamers. >> holy cow, i was thinking we need a stuttering boo-yah in this special show, we just got it. our prayers are answered. what's up? >> caller: i was wondering if

you could provide us with your special insights on dealing with buying and selling decisions for stocks that are splitting or paying dividends. >> okay. >> caller: and i'm particularly interested if we should be looking at what insiders or institutional investors are doing during this time. >> i am not going to say anything positive about a stock split because we know that in the end, a stock split is simply taking a pencil. now we have two pencils, we know that the pencil has just split and made two pieces of a pencil. but the dividend thing is different. i look at this market and say if a company has had a tradition every year of increasing a dividend 9%, they're increasing it 20%, what they're saying is please notice how well we're doing. that's a major change, that's what we look for in cramerica, that's what "mad money's" about, dividend boosts that are abnormally large, a sign we should pull the trigger. 52-week high plus insider buying equals nirvana and equals stay with "mad money."

do you boo-yah? >> boo-yah, jim. boo-yah, boo-yah. >> booming broadcasti ining voi boo-yah. >> a big aloha boo-yah. >> boo-yah! >> big buckeye boo-yah! >> boo-yah! >> to talk to cramer on the lightning round, call 1-800-743-cnbc. miss out on some "mad money," now you can get cramer sent to your phone. send a text to 26221, type mm, and hit send. to get "mad money" right in the palm of your hand. businesses more efficiently,

so we've brought in a team of experts to help. one suggestion is to make your shipping more efficient with priority mail flat rate boxes from the postal service. call or go online for a free supply and up to $160 in offers from authorized postage vendors. shipping's a hassle! weighing every box... actually, with flat rate boxes you don't need to weigh anything under 70 pounds. if it fits, it ships for a low flat rate. ok, but i ship all over the country. you can ship anywhere in the country for a low flat rate. ship international, too. yes, but i ship hundreds of things, in all sizes. great, because flat rate boxes come in

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you could be incredibly useful. think of this as the tool box. >> this is a hammer, we use it to hammer nails. >> that's creepy. isn't that creepy? i think it's probably something that bob nardeli thought of, the deposed guy took $200 million out of home depot. this probably his $200 million. they should pay him another $200 million. anyway, think of this as the tool box. tool box. it won't be doing that anymore. think of this as the tool box you need to i build a great portfolio. better than giving you stock picks, i'm giving you thousand to pick stocks, how i pick stocks. i'm teaching you to invest and trade like cramer. if not to be like me, because i got some severe emotional issues. frankly, you probably would prefer not to emulate. that's off track. so far i've given away two of my precious secrets. i look for stocks that have pulled back from the new high list. that's not a reason to buy in

and of itself. but it's a great place to look for potential buys. and i like to buy stocks at their highs and have some substantial insider buying. because it says the people running the company really believed the stocks have legs. and if they believe, there's probably good reason for us to believe too. but again, this alone is not enough to recommend a stock that i will use on "mad money." you still need to do the homework to check the fundamentals, to make sure you like the story behind the stock. remember, we work on the stock action and the company action on this show. the stock action being the mechanics, the company of the market, the company being the fundies, before you check out the fundies before you dive in and buy. what i'm teaching you are really tells. there's signals or things that tell you that a stock might be

worth owning. there are thousands upon thousands of stocks out there. and any method we can use to narrow down ones that might be attractive is a method worth having. now, i know that the critics, the numerous cramer critics whom, you know, look we don't fret about them at all. we don't worry about them, we don't think that they're trying to do this, no. they're fine. they're noble. my critics are noble, but my critics don't want me to do anything other than to continue to name hot stocks, which i don't do. this show is so not hot stock, it's scary. this is cold stock. but i talked about insider buying at the high. and while i usually don't use insider buying as a way to determine whether or not a stock has gotten it going, there's one other scenario where insider buying is a great reason for you to buy, as well. when a stock has a heavy short position. >> sell, sell, sell! >> meaning a lot of people out there have borrowed shares, sold

those shares, and are now waiting for the stock to go lower before they buy back the shares, return them to the bank they borrowed from, and collect the difference between the price they sold it at first and the price they bought it later, that's the mirror image. people selling it high and buying it low, you can think of shorting as just like regular investing only in reverse. shorts just turn around the buy low sell high thing. and their goal is to bet against the stock and profit from it. when a stock has a lot of shorts in it. that means there are a lot of people who have serious conviction, conviction that the stock's going lower. and it takes more to short a stock than it does to go long. because when you're short, the potential downside is infinite, right? they can keep going higher. when you're long, a stock stops losing money when it hits zero, like when you hit the floor. shorts lose money when stocks go higher, and there is no lid on

that. >> the house of pain. >> the other important note about shorts is that if there's a lot of them and a stock all of a sudden gets some great news, we get what is called a short squeeze. and it sounds exactly what it is. in order to bail on their positions, to run from their mistakes, the shorts can't just say, listen, i'm going to sell it. no, they've got to buy. they have to create actual buys that then drive the stock up because there's not a lot of supply. this is called covering. when a lot of shorts cover or buy at the same time in a panic -- >> no, no, no! >> -- the stock surges because what you really have is a lot of people desperate to buy the stock, a lot of demand created all at once. any time there's a lot of demand

created all at once, the stock goes higher. now, let's come back to insider buying. you have a stock with a heavy short position, and then some of the people who run the company start buying shares for themselves. it's almost like drawing a line in the sand for the shorts saying our stock goes this low and no lower. that's an explosive combination. and more often than not, it means there's going to be a short squeeze. shorts are smart. a lot of time they tend to be smarter than regular long side investors. they tend do their homework. but they don't know more than the insiders who run it. no one does. if a lot of people are shorting a stock and management is buying, do your homework. but usually you're going to want to side with management against the shorts and then you might be lucky enough to ride a short squeeze higher and higher. the bottom line, insider buying, by management, plus heavy short position, people betting against the stock equals -- >> buy, buy, buy, buy!

>> buy. cramer's fon gone mobile. now get "mad money" on your phone. "mad money" videos and more and free and real time quotes. go mm.cnbc.com. constantly taking the pulse of the market. you need someone who has the street credit and market intuition to be your guy however the market moves. let jim cramer be your man on the street.

welcome back to this special methods to my madness episode of the craziest and most enlightening, if not the best show on television give or take "the shield." we're talking about all the little tricks i used to find you opportunities to pick stocks to know when to sell. all the methods that made me a great money manager and, yes, i mean for all of my self-loathing, i was considered that. and that helped me put together this show every night so that i

can try to help you make some money. today i'm trying to transcend that model because i wanted to teach you how to do what i do for yourself. i'm not always here. although i seem to be. so far, we've focused on picking stocks. now i want to teach you about a way to trade stocks. trading is not a sin despite what the gray beards tell you. trading is a defensive way to make money. it is not for the yahoos and the crazies and the day guys, it's a defensive way to keep your profits. the way i do it is called trading around a core position. and it works best in volatile markets. but it's a discipline that you can use at any time. look, i know the wrap, at least among the cramer haters, it's that i'm all about trading, fast buck. that i don't have advice for regular investors, that i'm all short-term, you can't do what i

want to do and make your money. as a matter of fact, i lose you money. that's entirely untrue. the show is mostly about long-term investing, not trading. however, to put aside whatever little humility i have left as i sip that cheap scotch on my dirty linoleum floor, i will admit i was and remain a great trader. although, of course, now i can only trade for the charitable trust where i let you trade ahead of me by reading the e-mails that i send out before i buy anything or sell it. i can teach you some of this, and the first step is to learn how to trade what's known as a core position. what's that mean? let's go through it step by step. first you need a stock. pick one that you really like, not just one you're just into because you felt like you had to have something diversified. pick something you really like you have an opinion about. a bias about.

find a stock that you believe will be going higher over the long-term, maybe you buy it because short-term there's a problem, but long-term you feel great about it. what you're really looking for here is a great company that could get tossed around by market volatility. some strange thing happens in china, something happens in the middle east. but it will go higher and recover if you're patient. if you were just investing, then you'd set up a position in the stock, buying in increments because we all know that buying at once, buying a whole position at once despite what the brokers might want you to do is arrogance. i can't have you be arrogant. you buy 100 shares three times over the course of a couple of weeks and that would be your core position, done. but let's say you want to trade to be defensive as the stock goes up. a lot of people want to, but they feel discouraged. because they remember how all the amateur day traders got crushed when the bubble burst.

which is now so long ago it's starting to feel like just another distant memory. you can make money trading if it's done right. in the old days, when commissions were higher, that just wasn't true. the commissions would eat into your profits and it just wasn't worthwhile to trade. but that hasn't been the case for ages. ever since commissions came down, and remember, they're 1/10 of the commissions i used to charge when i was at goldman sachs in the '80s. now, let's come back to the notion of our core position. we have put on slowly, not all at once, not to be arrogant, 300 shares of a stock. let's say it's $100 stock, just to make things easy. every time the stock jumps three points, instead of 3%, you can sell 50 shares. again, this is just an example. you shave a little off to bring in some profits. then you wait until something happens and it can be for any form of idiocy as long as it doesn't hurt the basic fundamental outlook of the

company you own to knock it down a peg or two. as the stock comes down, you buy it back in increments. since we started with 300 shares, let's keep using increments of 50 to buy it back. and there is no penalty on commissions. in the old days if you bought fewer than 100 shares, you would have to pay the full commission, that's not true anymore. now 50 shares might appear to be small potatoes, up 3%, sell them again. but over time, those profits add up hugely. it is how i consistently outperform, meaning i beat the averages and beat everybody else. on wall street. all right, there's some guys who beat me, but not many. a lot of people think that trading is incredibly exciting, and it can be. but if you're good at trading around a core position, you should be bored. all you're doing is watching the stock move and trimming or adding to your position accordingly, you can do it up

ten, it doesn't have to be up three. i use that example to show you how tightly you can keep the range. we do have some rules to follow. in my example, we started with a core position of 300 shares of $100 stock. if i were trading around that as my core position, i wouldn't want to own more than 300 shares or less than 100, that way it would -- if we sell less -- if we have less than 100, we lose any plausibility of our longer term thesis coming true and making a lot of money. obviously you can scale these numbers depending upon how big your position is. but the basic idea is to avoid putting yourself in a position where you have too much on the table in case the stock gets squatted down or too little on the table to take advantage of any up side that comes your way. trading around a core position is an exercise in delicacy. bottom line, now you know the basics of how to trade around the core position.

that's another method yet again to my madness. don't miss a second of cramer. find each full episode of "mad money" on itunes and download it for free. take all of cramer's picks, pans, plus the lightning round with you on the go. get "mad money" on itunes today. go to madmoney.cnbc.com. you've got questions -- >> investors don't seem to know what to do. i don't know what to do. >> good, i do. you came to the right guy. >> "mad money," demystifying the market.

i've got one more trick to teach you tonight. one more method to my madness. and this time i want to talk selling. how do you know when to sell a stock? >> sell, sell, sell! >> how do you get out before the party ends? >> no, no, ahhh! >> so you're not one of the last people who get stuck cleaning up the mess. >> the house of pain.

>> this is a question that needs to be answered. because there's a lot of money to be made owning hot stocks with lots of momentum no one else will say this on air or off. hot stocks make you money. there are always naysayers, and eventually the naysayers get proven right. sooner or later all hot stocks do implode. but it usually happens later rather than sooner. and all the negative talking heads who kept you out of the stock with their recklessness, disguised as prudence actually cost you a great opportunity to make you money. and i can't do that. people shy away from these hot stocks because they don't know where they're going to top out. it's understandable. i'd be afraid to buy them too. if i didn't have a discipline that let me know when to get out. lucky for you i do have one. and you're about to learn it. first, when i'm talking about hot stocks, i really mean small

stocks growing, stocks with a low market cap to start and low research coverage and been going up for some time. these are small stocks on fire, we all know what they are. we've all following them. the key to figure out when it's peaked and when to sell is watching the analyst coverage. you have to use your own judgment here. a good rule of thumb is that once one of these hot stocks has at least four analysts covering it, up from zero, okay? four, the run is almost over. you can find how many guys are on stock by looking it up anywhere on the internet. this isn't hard to find, it's there. this formula has worked for me as long as i can remember even though no one else uses it now, you can. as far as i can tell, it works because the number of analysts on the stock is an excellent gage how much awareness,

sponsorship and interest there is in the stock. hot stocks get tapped out when there's nobody left to be attracted or promote them, when all the people who are going to buy them have already bought, there already is, they come out of nowhere, attracting more and more attention, more and more backers and eventually, there's no one left to buy. it's full up. when that happens, the run is over and it's time -- >> sell sell sell! >> to go. let me give you the quintessential example so you know what i'm talking about. hansen natural, hans. the hottest stock in 2004, the hottest stock in 2005 and the hottest stock for the first half of 2006. before it ran out of steam. split adjusted, hansen went from $18 and change at the beginning of 2005 to $200, when it peaked in july of 2006.

the whole way up, people were telling you that hansen, a beverage company that got its name from a monster energy drink, was just a fad, that it had to dry out, that it had to crash, train wreck ready to happen. it did do that but it took years for the momentum to run out. in the meantime i was saying -- >> all aboard. >> then i called the top in hansen because i know how these hot stocks work. it peaked in july of 2006. this was in part because the company did a 5 for 1 split. even though splits aren't supposed to do anything, this encouraged people who had been in hansen a long time to take something off the table. but there was another reason i believe it would peak a substantive one. that was because it picked up its fourth analyst. remember my rule of thumb. may 5th, 2006, take a look. got a top coming. when goldman started covering the stock, you had two months to

sell between goldman's initiation and the stock's peak. there was still some upside left after goldman started to cover. that upgrade moved the stock. but prudence at last, not describing or hiding recklessness, prudence dictated we sell the stock once it had four analysts. better to clear out early with your winnings than to wait for them to fade away. never begrudge a profit. hansen, as pretty much all other small hot stocks started to cool off once it hit that critical mass of analyst coverage. the bottom line here, small hot stocks are definitely worth owning, don't let anyone tell you otherwise. you must know when to sell! that moment comes when you see too many analysts jumping on the bandwagon. use my rule of thumb, four analysts to let you know when to run and book that fabulous gain!

stick around for more "mad money." don't get mad, get even. more "mad money." catch cramer at 6:00 and 11:00 eastern on cnbc. stay connected to cramer on madmoney.cnbc.com.

i like to say there's always a bull market somewhere, i promise to find it just for you here on "mad money." hope you enjoyed this special show. i'm jim cramer. see you tomorrow.