putting your money in index funds. the pundits and commentateors say it's too hard. that ordinary people can't invest for themselves shouldn't bother trying. i know from experience from rujing a half billion dollar hedge fund and returning 14% after all fees, you can do it if you're willing to put in the time and the effort and have you that inclination. but in order to be a good investor, you need to understand how the stock market actually works. that's why i'm doing something special tonight. devoting the show entirely to educating you. sharing some of the most important lessons i've learned in 30 years in the market. before i can start teaching you, you can start learning, there are some lessoned that need to be unlearned. myths about the market that need to be demolished. one. most pernicious myths the notion that the market is always rational. that the action always makes sense. that simply isn't true.

on any given day, the action in the market can be completely nonsensical. stocks can go up when they should have gone down, vice versa. entire sectors can move for totally bogus reasons. it's our job to help make sense of what's happening. sometimes we go too far, start cooking up explanations where there are none, trying to find logic and the reason behind moves that are nothing more than tails pulled by i hdiotidiots, signifying nothing. never assume just because something happened it has to make sense because the market always makes sense. not on a short-term basis. it's nonsense. on a day-to-day basis, the market does some crazy things. and it's important to say these moves are just nuts. they don't make any sense to me at all. once you start cooking up con kon c concoctions that don't exist, you are in trouble.

sometimes they go up or down. you want to take advantage of the irrationality, not buy into it for example, whenever we get a huge pulback, the stock market gets killed there, are be a lot of stocks that went down, they have gone down for bad reasons. hedge funds that are in trouble start selling, not because they want to, but because they have to raise money to pay back their clients who are busy singing bob marley's "redemption song." and regular sellers start to panic and become too afraid to buy or get blown out and start dumping stocks themselves. everything is down across the board and people in the press are start took cook up reasons, things that don't normally go together is all down at once. gold normally goes up when other things are down because people flee to safety. some days, gold is down too. when you hear that, you have to draw a line between the notion

of observation and explanation. both gold and oil are down, for example, it doesn't mean gold is down because of oil or vice versa. we hear those relations and those are bogus. how do you explain the sell-offs. not about the fundamentals of underlying companies. sometimes they are about the fundamentals of the money management business of which i am from. to understand the news, i want you to go back to 2008 and the early days of 2009. even the wild summer of 2011. we saw this act. the worst and most common mistake you could make, was to say that something traded at a given level it sdervedeserved te there it was right for oil to trade at $147 per barrel. can you believe that. and oil fell $33 to barrel, never read a single story when that happened, that's a wrong price. that's ridiculous. that's contrived.

an exaggerati exaggeration. you need to explain them based on the facts of wall street. when i first started trading, we measured the prospects of an underlying company. what earnings might be, the company might be to another company, to acquire how much cash does it have. does it make a lot of money off what it sells, but when we decided to lump stocks in giant baskets, they weren't even in a basket before the 80s. when we developed that instrument, we linked all stocks together as an asset class, and you know what happened? you all started to trade together in lockstep sometimes. whether the prock stspects were or bad, positive or next. commodities, like corn or wheat, wasn't limited to our country. one by one, they started trading in futures or efts. hedge fund managers pulled vast

amounts of money together and they dwarfed individual stocks. amounts of money so vast, they tried to buy individual stocks and buy all the shares of many of them. that's how much cash they had. and then they had to gravitate toward the futures markets. they are bigger than the actual markets and developed group think. traded in sync with each other based on the same tails. the tail biting the dog. believe me. you can't buy enough stock of a company to buy the future. you'll own the company, some of these guys. some of the big hedge funds would own the company. the height of the group think occurred when many hedge funds sold the exact same commodities and did it with borrowed money. many of the funds were whip sawed by events they didn't see coming and they had to sell, sell, sell, sell everything they had. they were positioned wrong. the company's survival, the management company's was at stake. that called a hedge fund gone wild and create fabulous buying tuns, while many stocks deserved

to go down, not everything deserved to go down. they certainly didn't deserve to go down as far as they did. this kind of thing continues to happen to this day. including the hazy, crazy, summer 2011. so many hedge funds buy and sell stocks the same way, like commodities. they think they are commodities, not pieces of paper, that represent shares of vastly different companies with different prospects and inputs. next time you see everything go down with the market seeming to move in lockstep, before you try to cook up excuses and believe in excuses, ask yourself if we might simply be seeing the results once again of hedge funds gone wild. the bottom line, the market doesn't always make sense, especially on a daily basis. when everything goes down, instead of dreaming up reasons why, based on fundamentals of underlying businesses, think about whether it's caused by the fundamentals of the wall street management business and out of control hedge funds.

let's go to howard in florida, please. howard. >> caller: hey, jim. thank you for taking my call. >> no problem. how can i help? >> caller: you have talked about the big manufacturing trade. and it's the meltup and meltdown days. what do you think the s.e.c. may do to the htcs in general? >> i think, howard, first of all, a great question. but the s.e.c. very recently blessed this. a few years ago they blessed this where they talked about this was double and triple powered etfs that they can't affect prices. and now we don't have a deep market, and consequently, these products are whipping around the stocks, the actual stocks, but the s.e.c. just blessed it. too embarrassing to the people who owe bin pined it was okay.

can we go to russell, please? >> caller: what is the disadvantage of triple leverage etfs? >> that they are marked to market every day basically. what happens, you could -- they are trading vehicles for the day and reset at the end of the day, so you could have a negative -- you could have an e.t.f. that bets against bank stocks and they can go very big. but they didn't go down on a given day, you will lose money on the thing. they are not a way to bet against bank stocked in the long term. they are a flawed product, and everybody should know and get rid of these things. let's go to dave in wisconsin. >> caller: how you been, man? >> pretty good. how about you, dave? >> caller: doing okay, man. doing okay. jim, i was champing at the bit to buy chesapeake, i used dollar cost averaging but to account the higher volatility, i used 20% increments instead of the

normal 33% increment. what do you think about lowering the increment? >> what you need to know, you have to be comfortable with what i call your scale. sometimes i use a $10 stock, my first line at 10, and my next line at 6, next line at 4. sometimes i buy 10, 6, 2. i like to adjust the scales depending on the volatility and i don't want to buy too much at once and like wide scales when the market is crazy. when everything goes down before you panic, stop and think about who is killing our profits? because if it's to the fundamentals, maybe it's just the fundamentals of the management business. "mad money" will be right back. >> we all know there is nothing more than family. >> on june 1 59, we're celebrating our fifth annual edition of "mad money" it's a familiar affair. >> once a year only, check it

out. >> want to join kraimer in studio for the special event? >> we are having a brotherly dispute. >> the family that intest veves together stays together. >> get "mad money" text alerts 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. ♪ [ piano chords ] [ man announcing ] what we created here. what we achieved here. what we learned here. and what we pioneered here.

all goes here. the one. the accord. smarter thinking from honda. [ male announcer ] introducing a powerful weapon in your fight against lawn weeds. ortho weed b gon max. with a new continuous spray wand. so you can kill invading weeds down to the root. without harming your lawn. guaranteed. ortho weed b gon max. i'm making my money do more. i'm consolidating my assets. i'm not paying hidden fees or high commissions. i'm making the most of my money. and seven-dollar trades are just the start. i'm with scottrade. i'm with scottrade. i'm with scottrade. and i'm loving every minute of it.

[ rodger riney ] at scottrade, we give you commission-free etfs, no-fee iras and more. come see why more investors are saying... i'm with scottrade.

when there are huge losses in the market, you have opportunity to buy good companies from stocks that have become bad because the market became bad. catch me saying things like buy broken stocks, not broken companies. which is the kind of saying that doesn't do you a lot of good on its own. in a really serious correction, almost everything will go down. certainly a lot of stocks that

don't deserve to will decline along those that do deserve to be lower. but here is the important question. how do you tell the difference between a broken company that's not bouncing back and a broken stock that can be reborn? tonight i propose to give you a new way to look at stocks, to help lead you away from broken companies and toward broken stocks. okay, what's is a broken company? corrections have caused this, right? in 2007, multiple sell-offs related to weak real estate markets. lots of bad subprime loans. companies that issued mortgages and tshellacing by big companie. in the summer of 2011, we had a concern of debt ceiling concerns in the u.s., a s & p credit rating downgrade and liquidity

concerns in europe. a deep sell-off and increased volatility. when you find yourself in the midst of celtoff, look at the companies that caused it, they are probably broken in 007, for example, that met everything touching housing, mortgages, really any kind of lending, fann fannie, freddie. you know. looking for a company that's part of the reason for correction, i can't guarantee anything, but are you looking at a broken company. then there is another group of company, that's not as bad as the first group, but pretty radio radio taif. they might not be directly related to the cause of the sell-off, but whatever caused the sell-off can cause these companies to make a lot less earnings per share. the 2011, these found themselves in government regulation in the great recession and slower gdp growth equalled slower in the sector. the company that becomes greeken when the reason have you for liking it goes away. a company does to the break when

its stock goes lower in 2007, a great example would be many of the terrific infrastructure stocks that get marked down with everything else in the sell-off. the oil companies or agriculture, none of the businesses would be directly affected by the credit crisis that cause the correction. that meant businesses weren't necessarily broken. saw it again in the summer of 2011. presenting more buying opportunities. the stocks went down because of all stocks going down. wasn't a connection of the causes of the sell-off. to put it another way, you don't want to buy stocks that are leading decline, you want to look for sell-offs in areas independent of the market. even if you are approaching a bottom and the worst performers are about to become the best performers as the market revesee reverses, it's rarely a safe bet. once a company breaks, it's difficult for it to mend itself. remember, a sector is so important. here is the bottom line. in a sell-off there, will be

stocks that have clear reasons for going lower, and once that just get sold along with everything else. the first are broken companies. avoid them at all costs, please. the second group are broken stocks and that's where you want to buy be doing your buying. let's go to patrick in arizona, please. patrick. >> caller: booyah, jim, from the arizona cardinals and sun devils. >> good to have you on the show. how can i help you, sir? >> caller: we talk about down turns, weaknesses, corrections. bottom line, when is a good time to buy the stock when you say this stock is a good -- right. >> caller: get a good pullback. how do you recognize the anatomy of a pullback or when to buy that stock? >> all right, all right. i think one of the things i like to look at, when a stock is in bull market mode and the fundamentals going in good shape. it led a pullback 5%. that's my rule of thumb, that's -- hard and fast?

no. 5% to 8%, where fundamentals are good. secondari secondarily, when you take the market down, wait until the recession stocks, tends to be a theory that declines it. and a cohen edd bottom, wait until kellogg bottoms if you want to get to the next level. 5% first day pull back, and when they buy them, i buy the next quarter. i buy in 25% increments if i can. let's go to douglas in california. >> caller: booyah, jim. thank you for keeping it real. >> thank you for calling. >> caller: i'd like to ask a couple of questions about the vix if i may, sir. after reading your stock replacement strategy and getting back to even, some who have gotten in trading have been confused by the vix, i want to ask, how does the market move

the vix or the vix move the market? >> it's a stock oscillator, up and down, and wide swings tell you basic the the emotion. it's a gauge of emotion. how about that? an actual way to put the numbers to emotion. and when we get emotional, emotional and we get extremes of emotion, i find that you want to be a buyer when you get that extreme motion down and you want to be a seller when you get extreme motion up. let's go to david in texas, please. >> caller: hey, jim. how are you? >> not bad, david. how are you? >> caller: doing great. i'm into buying some option trading and how does it compare to day trading? >> you can't do day trading and have another job. options are different.

if you can go out a few months, go deep in the money calls, out five, six months, that's just like earning stock, maybe better in a volatile market. two different things and i think you'll be fine if you do the latter, not the former. one of the great questions about investing, what's the difference between a broken stock and a broken company? the ones that have clear reasons, at the epicenter of the sell-off, those presumed, are broken catches. after the break, i'll try to make you more money.

ney. i've been a superintendent for 30 some years at many different park service units across the united states. the only time i've ever had a break is when i was on maternity leave. i have retired from doing this one thing that i loved. now, i'm going to be able to have the time to explore something different. it's like another chapter.

welcome back to the special edition of "mad money" where i teach you to navigate market corrections, the brutal declines in stocks -- that would ordinarily leave the best of us

in tears. or scared and heading straight for the dirty linoleum floor, only a brief layover at the liquor store to pick up cheap scotch stands between the ends of the show and that action. that's one way to handle a big market down turn and we've done that. not that lucrative. that's not what we do at "mad money," especially if we're under age. we have looked at how sell-offs have to be anticipated and relied on by good investors, they always happen. they shouldn't shock you. you know you have to circle the wagons around what you like. like i do for my charitable trust and leave the stocks you are not enthusiastic about in the dust. and i talked about the difference between damaged stocks and damaged goods, when hunting for goods during the sell-off. a correction is just to make a sale in stocks, no different on what you might get in all kinds

of things you get at sam's club. now i want to get more specific about the methods of my madness and the types of stock i like to hunt on days that are down. in other words, i'll take you hunting with me. because the more brutal the sell-off, the more attractive the hunting is. first, i'd like to find stocks that pulled off from highs in the sell-off. a new high is a fantastic, really great place to look for investing. these generally end up there for no reason, stocks get on the new high list, just because they are bad and they tend to be expensive, or they are thought to be expensive when they get there. you might love the company and think the stock is a great buy, but not at the 5 2-week high. this is what big declines were made more. you look for the stocks that get pushed a point under the 52-week high. i like to use 5% to 8% rule and

find a lot of great merchandise. not all of it will be worth buying. some stocks come off their highs will go lower for good reasons, because they are damaged goods and other stocks could only be knocked off that list because market conditions got so horrible, they took down everything. when you find a stock that in order to go down requires a correction, it's wall street jibber ish for a huge decline, probably something wonderful sitting right there. not all the time. use your discretion for each individual stock, but usually the ones that get knocked down from highs by a correction will be the stocks that recover hardest and fastest from the carnage, unless they are part of the reason for the carnage. a damaged company sits under the damaged stock, that's not a place you want to go near. that's the first group of stocks i want you to look at. 52-week high fallen angels. you should have one stock pulled back from its high on the sales list. which is really what i want to teach how to make money here. now, you want to list the stocks

if you would buy if the stock took a nose dive tomorrow? when the decline does come, you will be taking advantage of it rather than being a victim of it? the second kind of stock to keep your eye on, those are stocks with dividends that become a whole lot more attractive as share prices go lower, you should be watching the 52-week high list, you should keep your eye on the stocks you should buy if dividend yields were higher. a market correction will give you higher yields. and pardon if you already know this. trying to reach everyone out there, including second graders that don't know the difference between stock and bonds, and 3-year-olds who really just like animal noises. dividend yield is the size of the annual dividend. let's say $1, divided by the share price, $letlet's say $20. that's a 5% yield.

as the price goes lower, the yield goes higher. dividend investing isn't sexy, but let me tell you, nobody ever woke up happy after bringing a home a stock way big dividend. get more conservative, you want stocks that are practically -- nothing guaranteed, but put money in your pocket regularly. don't buy a damaged company, just because dividend is skyrocketing. a damaged company, you can bet that company might have to cut its dividend, which defeats the entire person of hunting for stocks with newly attractive dividends. a good rule of thumb when you are trying to tell if a dividend is truly reliable, look at the company's earnings or profit. at least twice the size of the dividend payment, the dividend is reasonably secure. here is the bottom line, a sell-off an opportunity to buy, especially those stocks just pulled off their highs. stocks with nice yield that have grown larger because the stock's

decline. let's go to laura in my home state of new jersey. >> caller: jim cramer, how are you doing? >> not bad, laura. how are you? >> caller: i'm fine, thank you. don't let "squawk box" take us away from you. we love you in the morning, but we need to see your face at night. i'm concerned. >> don't worry. >> caller: good. i wanted to talk about a stop/loss order on netflix. just before earnings came out, hoping the news would be good, but fearing it wouldn't. >> right. >> caller: it wound up not being good, it took a pummel in the afterhours market. i thought i was protected, but i was not. i watched in horror. >> everything has to be done by hand, individually. you want to sell a stock, you go in, with a limit, and you sell it.

no stop/loss orders. i can't tell how many people, just what you said. all my life i've heard horror stories just like that and only had to say, listen if you can't monitor it yourself, don't do it at all. let's go to calvin in texas, please. calvin. hey, cal. silent cal. >> caller: hi, jim. a great booyah to you today. >> right back at you. >> caller: my question to you is what type of investments are appropriate in a bull or bear market, cyclical or secular? >> okay. i like -- in a bear -- actually, look, in a bear market, nothing works, okay? in a bear market, we're just trying to lose less. and i -- oddly, i got to tell you, in a bear market i like the cyclicals more if they've been brought down, usually a bear market ends when estimates have come down so much that the stocks do well. secular growth stocks say

expense nif a bear market. in a bull market, i like secular, cyclical. i have a pressed election for those whose earnings have been cut so much. pat in illinois, please. pat. >> caller: jim, thanks for your help. listen what is your opinion on the new 10 percent up tick rule? especially with hf -- >> it means nothing. >> it's not going to help. not going to do better. we need to reinstate the up tick rule against short selling. the s.e.c. is about three years away from recognizing this has destroyed a lot of wealth in the country. and they will never talk to me. why? i don't know. because i've been around for 31 years and i think i represent the people better than a lot of people that people talk to. if they ever want to talk to me on this, i am more than happy to explain to them the way the world really works, not the academic world, but the actual

world. correction, sell-off, no matter what you call it think of it as a buying opportunity. please don't bury your head in the sand. you'll miss great ideas. stay with cramer. it's very important to understand how math and science kind of makes the world work. in high school, i had a physics teacher by the name of mr. davies. he made physics more than theoretical, he made it real for me. we built a guitar, we did things with electronics and mother boards. that's where the interest in engineering came from. so now, as an engineer, i have a career that speaks to that passion. thank you, mr. davies. in your fight against bugs. ortho home defense max. with a new continuous spray wand. and a fast acting formula.

so you can kill bugs inside, and keep bugs out. guaranteed. ortho home defense max.

now there is an entire cot aiblg industry of commentators and pundits devoted it telling you you will never beat the market. that you cannot win. so it's -- it's really better to simply put your money in an index fund that mirrors the market itself. and to try to pick and invest your own. right, to try to pick stocks? i think that's garbage. you can beat the averages as long as you know what you are doing. this is particularly important to keep in mind after a sell-off period. that's why i spent so much time trying to educate yourself about how the stock market works on individual stocks. i'm devoting tonight's show to some of the most important lessons i've learned in 30 years of trading. lessons that avoided opportunities and avoid some of the worst mistakes and pitfalls of investing. right now, i got a rule from getting back to eden that will help you avoid getting burned.

don't trust buybacks. don't trust when a company announces it will buy back a lot of stock. i have to tell you, i used to believe in large buybacks. one from companies that purchased their own shares, and you wanted to take them out of equations, sharsz outstanding, boost earnings per share. i thought they were worthwhile. and cushion stocks, bad buybacks were the exception, not the rule. buybacks are a way for a company to reward shareholders with cash i thought. we thought dividends were much better than buybacks. buybacks have become increasingly popular. from the beginning of 2005 to the middle of 2011, all of the companies of the s & p 500 spent 2.$2.24 trillion in stock buybacks, significantly more than 1$1.4 trillion that they spent on dividends, and, unfortunately, these buybacks haven't given the value that they thought they would. they turned out to be gigantic waist wastes of money. almost in a majority of cases.

and buyback and puny dividend. i want you to be suspicious rather than bullish. the track record looks better thanks to the huge rally of 2009. in the wake of the 2008 crash, it's not hard to find companies that squandered their money by buying back stock at higher prices. but some companies have been a whole lot worse than others. here is a group that just stands out. the hmos, aetna, well point, united health group. some of the worst buyback offenders. we'll use them to illustrate. these are the kind of large companies that you would expect to pay good dividends. they kept their dividends small. why? in order to have massive buybacks. some were selling stock at the same time the company was buying it back. if you ever believe buybacks are beneficial to shareholders, these three hmos surely proved

that wrong. the buybacks were far less helpful than paying meaningful dividends. all three companies could have had yields of over 3%. a level where the yield becomes accidentally high and makes stocks far more attractive, particularly in the kinds of sell-offs we had. we will point, paid billions on buybacks. with the hmos, some of the worst cases of companies buying back stock in order to generate earnings per share. a buyback can we a great way to create the perception of growth. what about the notion that a buyback can help cushion the stock's fall in a bear market. by ensuring that they are ready to step in and purchase stock. i thought this at one point. but the evidence says otherwise. short sellers are just ordinary sellers in a panic and almost can always overpower a company

trueing to buyback stock. especially how much companies can buy on any given day and when they can buy it. a dividend creates yield support. no group is more aggressive when it came to buybacks than the banks, leading up to the crash of 2008. those banks didn't do an ounce of good. sometimes they faced off a rapid fire onslaught of short selling and etf selling that hammered down every bank in sight. as soon as the shorts were armed with a new found power to bang back stocks over and over again, the buy back was a big waste of money. power, by the way, granted by the securities and exchange commission. when it appealed an old depression era regulation, called the uptick rule, and it forced investors to wait for aboveback prices. they didn't have to wait. the sellers could push, and you will see executives try to call bottom on their own stocks.

they don't know anything. these attempts at babe ruth style call shots almost always fail. turn out to be another waste of shareholder's money, the executives try to not understand the stocks as well as would you have expected at least, the appearance of out of the bottom, when they continue to decline. some circumstances, you see reasons enough to sell it. never want to own the stock of a company that's waist wassting t company it needs on useless buybacks or spending money it doesn't have on an activity as fruitless as repurchasing shares. you shouldn't rely on even the largest buyback to help pry up a stock if the situation becomes dire. there are false signs of health and too often a gigantic waste of shareholder's money. stick with cramer. ♪ how are things on the west coast? ♪

♪ i hear you... ♪ rocky mountain high ♪ rocky, rocky mountain high ♪ ♪ all my exes live in texas ♪ ♪ born on the bayou [ female announcer ] the perfect song for everywhere can be downloaded almost anywhere. ♪ i'm back, back in the new york groove ♪ [ male announcer ] the nation's largest 4g network. covering 2,000 more 4g cities and towns than verizon. rethink possible. wanted to provide better employee benefits while balancing the company's bottom line, their very first word was... [ to the tune of "lullaby and good night" ] ♪ af-lac

♪ aflac [ male announcer ] find out more at... [ duck ] aflac! [ male announcer ] ...forbusiness.com. [ yawning sound ] ortho weed b gon max. with a new continuous spray wand. so you can kill invading weeds down to the root. without harming your lawn. guaranteed. ortho weed b gon max. without harming your lawn. guaranteed. if you made a list of countries from around the world... ...with the best math scores.

...the united states would be on that list. in 25th place. let's raise academic standards across the nation. let's get back to the head of the class. let's solve this. how did i get here? dumb luck? or good decisions? ones i've made. ones we've all made. about marriage. children. money. about tomorrow. here's to good decisions. who matters most to you says the most about you. massmutual is owned by our policyholders so they matter most to us. massmutual. we'll help you get there.

now, after a sell-off, in order for stocks to move hueir, they need to have the fuel necessary for a rally. maybe some rocket fuel. what's the fuel? cash. cash. sometimes a fuel comes from retail investors who have taken the money off the sidelines and putting back to work in the stock market. not that much, but it does happen. when money is flowing into stocks in endless waves and hedge funds desperate to own stocks, you are in the land of 1,000 pole dances. the music hardly plays anymore. as long as more and more dough flowing in the market, it's easy to find groups of stocks that flow higher. and you got to buy the dips each

time they occur. that's the formula for dip buying, not willy-nilly dip buying, it can take a long time for regular people to become accustomed to putting their money in stocks after a serious sell-off when they are frightened. no money flowing in the market, even with outflows, detailed for a long time now. you can have powerful moves in the stocks and sectors, that are trying to assert their leadership. the fuel to make those moves happen can't come out of thin air. it's money ands it has to come from somewhere. people are reluctant to invest, the money will simply be pulled out of least exciting area, the least interesting group of stocks as investors swap out of them and swap into the more fashionable needs with more lift. people who own food and drug stocks will happily sell them to raise cash. just one problem here. without new money flowing in, the advance comes from zero sum. ultimately you can run out of fuel. as soon as selling comes to an end, leaders run out of steam.

nothing left to drive them higher. the market coming out of the market, and when investors are on the sidelines, they are reluctant to commit capital, something worse can happen. this will sound theoretical, but you can get a rally in the wrong stocks. food and drug stocks can become market leaders and all of the cash that market investors pull out, goes right back in. they think another down turn must be ahead, and knupp durables, great value. you never want to see any of the consumer staples roaring higher. i saw that in 2000, you knew tech was finished. it means people think the economy will get worse or simply stay in awful shape for long time to come. one of the most horrifying things you can see in the stock market is powerful rally in the wrong stocks, atlrias, the

pepsis, kellogg's, and heinzes. nothing more disconcerting than watch a beverage stock plow it's way high ee eer without understg of the damage it's doing to other stocks. nu need to become more cautious. watch the sector leadership to give you a read on macro sentiment in order to time when you expect more of a sustained rally. in the meantime, look for opportunities to buy high hauf quality names where companies and not stocks are broken. and be aware of buybacks that artificially prop up stock prices. only to see stocks go right down from unstoppable, high frequency-bombers. oops. i mean traders. "mad money" back after the break. >> we all know nothing more important than family. >> on june 1 59, we're celebrating our fifth annual edition of "mad money."

it's a family affair. want to join cramer in the studio. >> we are having a brotherly dispute. >> the doctor is in the house. >> head to madmoney.cnbc.com for free tickets. >> the family that invests together stays together. snoor

oor today is gonna be an important day for us. you ready? we wanna be our brother's keeper. what's number two we wanna do? bring it up to 90 decatherms. how bout ya, joe? let's go ahead and bring it online. attention on site, attention on site. now starting unit nine. some of the world's cleanest gas turbines are now powering some of america's biggest cities. siemens. answers.

how about mad mail. from craig, booyah, jim cramer. i watch your program most every night with a pen and paper and a bev ran beverage, taking copious notes. what do you do with a stock doing very well and seems to weep going up, with only a few minor pullbacks? what approach do you take with a hot momentum stock? buy on baby dips and keep fingers crossed? two-ways to approach this. for a high-level stock, i like to use deep in the money calls a stock replacement way. as the stock goes up, and you sell common stock against the call, and if you have a sudden dip, buy the common stock back. you are shorting common against a call option. what i like to do if it's an individual stock that i own, i

like to take it out in increments until i get the house's money, okay? once i'm only playing with the house's money, i let it run and i don't care where it goes, i can own it forever. here is one from linda. jim, i usually receive dividends in cash. you mentioned reinvesting dividends in your show. why and when should i elect to have dividends reinvested? linda, always. if you look at the s & p, how it's done, reinvested dividends have done well. if you didn't reinvest dividends, it's done poorly. let the dividend re-accumulate and over time, even for companies that kind of do nothing, have a 5% yield, you will double your money over a very short period of time. reinvest dividends. if you only learned one thing from the show, other than being diversified. reinvest dividended. ryan in california. air force booyah. 27 and i want to get serious about investing in my roth

i.r.a. i think my best bet is to pick three or four solid stocks. it's important to do homework, but with so many companies to learn work where do i start? start with companies you like this is aon old peter method. "one up on wall street" maybe greatest fund manager of all time. he wrote a fantastic book on how to get started. you start with something you like, visit it at the mall, whatever, and you do the homework, check conference calls, see how the company is doing, buy a little. once you buy a little, wait for it to come down, one of the things i learned about, first buy is almost always not your last buy, that's how you get comfortable. pick brand name companies do, homework. if it goes down, ask yourself beforehand, before it goes down, what do i want to buy more? is it cheaper or i'm afraid the company is broken? if you can answer it's cheaper, have you a winning hand. here is one from france.

booyah from france. can the fundamentals affect intrain day performance? we don't care about the intradaytime frame unless it's wildly imohtive. if you trade intraday, all right, you pick your spots, go read the book real money. i talk about the day trade. the most important thing you need to know. be out at the end of the day, don't develop new reasons why you own it. you bought it for trade, because it hit moving averages. not my style. that's technical. bought it because you expect catalyst tomorrow. that's fine. once it occurs, go, go, go. that's the essence of day trading, all about discipline. discipline trumps conviction when it comes to day trading. here is one from andrea in wisconsin. excuse me. hi, jim. i'm looking at avrmt p.e. ratios over the last 100 years. i know, exciting stuff. hey, my kind of stuff. it appears it will get down to around 10 before we're due for another bull market.

what are your thoughts on this? is this analysis valuable? >> no, it's not. the stock that looks like it will look like it's selling ten times earnings may be selling 40 times earnings. we do care how cheap or expensive versus interest rates. we want a cheap market if we will buy versus owning bonds. overall, i have never put much stock in that the p.e. of the entire market is cheap, and the reason i vane, a lot of times it looks cheap, right before it gets really dark. okay. here is one from ryan in texas. jim, booyah, thank you for educating us. you always say to be on the lookout for the next big trend, and i believe there is one that incorporates one of your favorite themes, mobile computing what are your thoughts? is the way to play this with a chipmaker or go bigger and look at credit card companies? i don't want to do any of those. a battle going on between apple and google, okay? about the mind share of mobile and that's -- one of these two will be the platform that wins.

maybe both, probably one. get comfortable with one, and that's the one you should buy. stick with cramer. >> stay connected to cramer on m madmoney.cnbc.com. [ man announcing ] what we created here.om. what we achieved here. what we learned here. and what we pioneered here. all goes here. the one. the accord. smarter thinking from honda.

recently, students from 31 countries took part in a science test. the top academic performers surprised some people. so did the country that came in 17th place. let's raise the bar and elevate our academic standards. let's do what's best for our students-by investing in our teachers. let's solve this.

seconds away on "the kudlow report" the president on the attack of private equity again. could the strategy backfire? is it a case of presidents who live in glass houses shouldn't be throwing stones? and iran even closer to its goal of nuclear production. is the white house doing enough? or is it putting us on a collision course? and with the concerns over europe, are we ignoring another possible, perhaps even bigger threat to the economy? a dysfunctional china. "the kudlow report" moments away. >> i like to say that there is always a bull market somewhere, and i promise to try and find it just for you, right here on "mad money." i'm jim cramer, i'll see you next time. good evening, everyone. i'm michelle caruso-cabrera, in for larry. larry is not only a tv mega