volatility, suppression of volatility. watch it go higher in 2017. >> looks like our time has expired. i'm melissa lee. thank you for watching tonight, and following 2017. for more "options action" check out our website, and check out our daily segment "inside healt new year's happy 2017. my mission is simple, to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere, and i promise to help you find it. "mad money" starts now. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm just trying to make you some money. my job is not just to entertain you but to educate and teach you. so call me at 1-800-743-cnbc or of course tweet me @jimcramer. tonight i'm letting you in on something real big. the method of my madness. come on, i know this is the

craziest, most random thing on not just business tv but television in general. i also know you won't find investing advice this good anywhere else. unless you're one of those people who tunes in just to see if tonight's the night that i actually do walk the rails, which after multiple years erring is a possible. bound to happen one day although i do my best so it doesn't. this show is all about the methd odd or methods to break from simply quoting the bard to my mad ness. how do i pick stocks? why do i tell you some stocks are worth buying now or on a dip instead of just like, hey, you know what, tomorrow? that's the question that everybody would like to know. so tonight i'm going to give you pieces of the answer. let's get rolls. one of the easiest ways i identify potential cramer names for "mad money," the stocks that could but won't necessarily always end up on the show, is by watching my favorite list from

when i was frankly a little boy in fifth grade. i used to look at the new high list. i thought it was like the guy who's were hitting better than .300 in baseball. stocks on that list, the highest of the high, obviously have something going for them. that's especially true when the market is in bad shape as only the best of the best can hit new highs when the market is falling apart. so what does it tell you when a stock hits the new high? either that it's part of a genuine bull market or the company itself has some serious earnings or sales momentum, or maybe its sector does, which is so often responsible for a stock's increase. no matter how they get there, many stocks on the new high list often keep going higher because it's really a list of a students that are worth investing in. the a students tend to repeat themselves in the process every quarter, just like the really smart kids in school. in a great bull market like we've had from the bottom in 2009 and any market by the way that doubles from the bottom has to be considered a great bull market, even as i know so many resist such labels, we saw this

new high lift phenomenon over and over again. the same stock with hit new high after new high after new high, and following them was a great way to make money even as the bears claimed the bull market was false and couldn't be trusted. listening to the bears caused you to miss out on one of the greatest rallies in history. generally speaking, things have worked and will continue to work because these stocks typically represent companies that are best of breed. always remember that phrase because it's integral to "mad money." i am not saying that just so you can chase stocks that are hitting their new highs because they'll keep going higher. that would be the ultimate foolishness, true bozo the clown behavior, when i used to have hair. i'm saying if you want to identify stocks that will be winners in the future unless there's been a big sea change, looking at the biggest winners of the present is a pretty good place to try to figure out the future.

let this list do it for you. it's already been scrutinized and scrubbed. that's the thing about the market. it's not always that hard to play once you understand that there's often for continuity than change. things pretty much keep going the way they're going until something major shifts, and then you do have to alter course. those course changes can be pretty radical, though, and that's why you always have to be re-evaluating your ideas and should never dig in your heels when the facts change. something we emphasize over and over here and it also infuses my columns in real money and all of my books i've written save my autobiography, confessions of a street addict, which is more of a score-settling tome, settling scores with myself, of koshs. it isn't called "mad money" for nothing. but you know what? when you're looking for stocks to invest in, when you're hunting for the bull market like i always do here, looking at the new high list is a terrific way to begin. i don't just pluck names off the

list. i am many things, a lot of them negative, but lazy and irresponsible, i don't know. anyone that sees my insane tweets at 5:04 @jimcramer, knows that is me tweeting. some people say, is that someone else tweeting for new who else would get up that early? you can't do that. then of course the obligatory, do you ever sleep? i mean, well, no. at least not for any long stretch. i play the same standards, though, of rigor to this show that i used at my old hedge fund. so i rarely recommend stocks that trade off the new high list unless there's some special circumstances. what i do like to do when i'm hunting for stocks and what you need to do is wait for the fabled pullback from the new high list because that is the best place to put money. the pullback, and there i'm thinking about something that could be 2 or 3, preferably 5%, that gives you a good entry on something on that list. i am not telling you to chase momentum. you should always be conscious of price and therefore try to buy on weakness just like you want to sell into strength.

most people can't pull the trigger when a stock is going down because they think something is wrong. i'm telling if it's on the new high list and comes down, that would be your man. i'm throwing these caveats in because i don't want you to look at the new high list as your shopping list. that's a mistake. it's a jumping off point, albeit a very important one for those trying to get started. poring over the new high list is a fabulous way to identify potential stocks to buy. you only buy stocks that have pulled back from the new high list if you're confident they'll make a comeback for substantive reasons having nothing to do with the market. you have to do all the same homework you ordinarily do before buying a stock. you don't get a pass there. you absolutely must have conviction, even if it's a cynical conviction this stock is going higher, and i do that for a lot of the ipos where i'm saying, listen, me, i accept they're just pieces of paper, meaning, you know, the big boys can't resist growth stocks, right? they will always come to the support on down days. the biggest caveat of all when you're shopping from stocks that have pulled back from their new

highs, make sure they haven't pulled back for a good reason, that the selloff is extraneous to the business. don't go buying a homeowner that's down if interest rates flew up because they could at least initially get hit with the quarter. don't by a big independent oil stock when oil goes down for three straight days. i always like to say you're looking for a stock that has bristol-myers-like strength because almost nothing has to do with bristol-myers. be sure you're not dealing with a troubled company that is going down, down, down. another key part of my flof, if the fundamentals haven't changed, the stock probably hasn't fallen from grace. it's pulled back for largely mechanical reasons, profit taking or panic in the market. now more than ever, thanks to the fact stocks is x-raytraded commodities -- double and triple relates etfs is, you see the stocks of good companies pull back from their highs for nothing that happened to do at the company. nothing to do with the company

or the strength of the underlying businesses. those are the buys. >> buy, buy, buy. >> but if the fundamental picture changes, if whatever made the stock attractive as it climbed its way up to the new high list goes away, then that stock is no longer a candidate. >> sell, sell, sell. >> the story has to be intact or this method will let you down. while it isn't a hard and fast rule, i tend to like stocks have pulled back just enough but not too much. i have to tell you 8% is the historical optimal level of a pullback that i've really made a lot of money in. less than that, you know what, you're going to be early for some of them. more than that, maybe something is indeed wrong with the stock. you just don't know. 3%, 5%, 8%. those are all important levels. that 8% level, man i've made a killing when i buy them down 8%. bottom line, that's the first method to cramer's madness. watch for stocks that have pulled back from the new high list. some of my best picks have come out of this process. it's my getting to workshoping list. why don't we start with arzela

in ohio. arzela. >> caller: hi, jim, and booyah to ya. >> booyah right back. >> caller: i'm trying to get a better insight on mutual funds, and i'd like to know are they a good way to diversify? >> well, you know what, i got to tell you, arzela, here's the problem. a lot of people have 401(k)s where you have to have mutual funds and you can't pick individual stocks. for that, they are. i like to have 20% international, 50% growth. the rest will be kind of a balance situation, maybe a fund that has some bonds. you have to depend on your outlook and your age. but, yes, mutual funds are fine. try to look at some of the performance records in morning star. that's what i use. stuart in florida, stuart. >> caller: jim, whatsz the best time to use stop orders after you purchase a position? >> no, queer nwe're not going t that. if we're going to trade actively, we're going to have to pay attention to it. we don't need stop orders because what could happen, the market could be down 10% on a

flash day. you'll have sold the stock and it bounces right back, and you'll say what the heck happened? we don't play it that way. we invest on "mad money." we're not traders. we invest. there's a method to this madness, and tonight i'm revealing it all. first method, looks for stocks that have pulled back from new highs, especially because of a broader market selloff having nothing to do with the individual stock that you want to pull the trigger on. stay with cramer. >> announcer: don't miss a second of "mad money." follow @jimcramer on twitter. have a question? tweet cramer, #madtweets. send jim an e-mail to madmoney@cnbc.com or give us a call at 1-800-743-cnbc. miss something? head to madmoney.cnbc.com.

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welcome back to tonight's methods to madness special where i'm revealing some of my best tricks for buying and selling stocks truly timeless investing wisdom for the ages, i hope. next up, how do you find stocks that are great buys? 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 been 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 and wait for some weak ness, maybe down 5%, 7%, given how volatile the market has become, there are very few occasions when buying a stock right off the new high list or that close to it is justified. but sometimes the stock is so hot, you got to buy it whenever you can, as soon as you can, because it may not be going lower anytime soon. you won't find these often, but when you find them, you have to remember not to buy all at once. if you want to buy 100 shares of stock, you think it's got so much mojo, go ahead and by 25 shares. worse happens, it goes higher, you don't get to buy more and you grab a quick profit. find another stock. believe me, there is always another stock to find. now, i've got an exception where it's okay to buy a stock right around its high. if you see insiders buying the stock when stock's up a lot

already, i'm going to give you a total -- >> buy, buy, buy. >> -- green light. it is a rare thing to see happen, but in my experience, it's rarer still that this method of picking stocks doesn't work out. see, i love it when insiders buy after a decent run because that's a great sign of confidence that they think the run is just beginning or there's a big runway ahead, and they are sure that it's long-lasting. remember, you can't flip a stock immediately if you're an insider buyer. you have to wait six months. government takes away the gains otherwise. it's the law. so these people are seeing things that they like that aren't going to disappear in six months' time. if anything, they haven't appeared yet. normally insider buying ranges from being meaning also to a small but on its own insufficient reason to buy a stock. a lot of times you're going to catch insiders buying their stock, they want to give the impression of confidence, create an illusion they're doing better than they really are. insiders aren't stupid. they know if they're seen buying their own stocks, the market will smile upon them. so they play the system. hey, that's fair. but it means we ignore most tiny insider buying because, well, it

could be kind of flim flam. we used to also call it painting the tape. kind of makes it look better than it is. that said, when you get truly colossal insider buying, even if it's not at the high, you might want to take another look at the stock in question because it's a pretty powerful endorsement when the insiders buy a whole lot of stock. it's really the volume that declares its sincerity, but we're only concentrating on stocks that have been running and aren't perceived as being historically cheap. there's nothing more arrogant and yell at the timing than when an insider backs up the truck for its own stock when it's been rolling along at a good clip. they're saying, yeah, we know we rock. our stock has been en fuego. we're so confident it will keep going higher, we're going to buy hand over fist. we're not waiting for a pullback. this is bankable hubris. i see it time again. hey, if their stocks are on a

tear, let's assume if they're buying, they probably two know something. not everyone deserves the benefit of the doubt in this business, and after the financial crisis and the market meltdown at the end of 2008, i know a lot of people think that all ceos and executives for that matter are a bunch of crooks, frauds, and mount banks, especially those who got burned owning the old, say, fannie mae or lehman brothers, but, look, that's the wrong lesson to draw from the crash. healthy skepticism is one thing, a total unwillingness to believe in anything positive is something else entirely. if you're going to own stocks, you need to be willing to extend some measure of trust to the people who run the companies that you own shares of. what else could be going on to spur buy something we've had a massive amount of consolidation in a host of industries of late. we've seen it in airlines, rental cars, foods, telecommunications, entertainment. perhaps these executives are buying stock because they hear the footsteps. maybe they've been contacted by some other company and turned that company down.

if executives expect they may be next, it could be a healthy and honest reason to buy. of course they have to disclose anything that's a serious bid. a lot of times, they just get a phone call, say no, bye. well, they do that because the company is worth more than they thought. maybe they think the company could be broken up like the old tyco. maybe they see the ability to create value and they want in on it themselves or maybe the stock has run a bit but they don't think the run is over because they recognize how much better the company will be when it's divvied up. for us, buying after big runs can be a bit reckless and lazy. most investors are smart enough to wait for a pullback. insider buys after decent runs tells me these guys don't think there will be a pullback and there's nothing more bullish than that. sure i want to wait after they bought, but that's the best of all possible worlds, and you usually don't get that. one more method of cramer's madness, when you see insider buying in a stock that's already had a solid run, you probably want to be buying too. bob in new york, bob.

>> caller: jim, steeler booyah to you. >> steelers from new york, all right. well, why not? what's up? >> caller: i have a question about interest rates. when the fed raises interest rates, good companies with attractive dividend yields and growth prospects suddenly rapidly go out of favor. can you add some clarity to why? >> well, because people extrapolate there, bob. once they see rates start to go up, they figure they're going to go up for a while. if that's the case, they want to get out what they perceive as being a risky yield, which is a stock yield, and go into what's a certainty, which is a bond yield. so it's all relative basis. rick in california, rick. >> caller: booyah, jim. >> booyah, rick. >> caller: how do i add to a position if my stock hasn't gone down to the average list price? >> no, you can't. i'd say the vast majority, not just a few times, we pay up above our basis, well, i got to tell you. >> sell, sell, sell. >> you got the picture. here's another method to my

madness. when you see insider buying in a stock that's already had a big run, think to your simple, i might want to be buying here too. after the break, i'll try to make you even more money.

you're in luck because you

called cramer on a good night. i'm not going home to sip that cheap scotch on my dirty linoleum floor. by the way, i got to apologize to dewars, which i once suggested was the linoleum floor scotch of choice. it's actually good stuff. never mind. okay. don't waste that one on the dirty linoleum floor. tonight obviously i'm in a great mood, maybe in a manic mood even. let's say i'm pretty darn productive when i'm in high gear. so revved that i'm revealing many secrets to methods to my madness. start jotting some things down because i got to tell you something that could be incredibly useful, better than giving you some stock picks, i'm giving you some of the best ways i know to pick stocks. i'm teaching you how to invest and trade like cramer, if not to be like me, because i got some emotional things cooking here, but at least to emulate me. so far i've given away two of my

appreciate precious secrets. i play with an open hand, allowing subscribers to see all my trades before they happen. i look for stocks that have pulled back from the new high list. that's not a reason to buy in itself but it's a great place to look for potential buys. and i like to buy stocks that have had big runs and still have substantial insider buying because it says the people running the company believe their stock has legs. and if they believe, there could be a good reason for us to believe too. again, this alone not enough to recommend a stock. you still need to do the homework, to check the fundamentals, to make sure you like the story behind the company before you dive in and buy. what i'm teaching you tonight are really what i call tells. that's right, they're tells. they're signals that a stock might be worth owning, that it's worth your time and effort to go through the often boring process of reading through the conference call transcripts and quarterly filings. there are thousands of stocks out there, and any method we can use to narrow down the ones that might be attractive is a method worth having. we've talked about insider

buying at the high, and while i don't usually use that as the only way to determine whether or not a stock has got it going or not, there's one other scenario where insider buying makes for an incredibly bullish tell. that's when a stock has a heavy short position, 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 firm and collect the difference. hopefully they sold it high and bought it low. you can think of shorting as like regular investing but it's in reverse. we try to buy low and sell high. shorts turn that around. they sell high and try to buy low. when a stock has a lot of shorts in it, that means there are a lot of people that have serious conviction the stock is going lower. it takes more conviction to short a stock than go long because when you're short, the potential down side is infinite. when you're long, a stock stops looking money at zero. shorts lose money when stocks go higher and higher. there's no lid.

the other important note is if there's a lot of them and a stock gets some good news, we get what's called a short squeeze, and it sounds exactly like what it is. in order to bail or close out their positions, the shorts have to buy. this is what's called covering. when a lot of shorts cover at the same time in a panic, the stock will surge because what you really have is a lot of people desperate to buy the stock, a lot of demand. they have to buy unless they want their years wiped out as so many short sellers had in the last few swoons when the market refused to quit and then went right back up and the shorts hadn't covered or bought the shorts. they hadn't brought them in. so where does insider buying fit in? you have a stock with a high short interest. that's a sign that much of the float has sold short. then some of the people who run the company start buying shares for themselves or an outsider like coca-cola, santa fe with regeneron takes more than a 10% stake, indicates they want more. those are three situations where the shorts kept shorting and they got crushed. they should have done buying, not shorting. it's almost like drawing a line

in the sand for the shorts. they say our stock goes this low and no lower. this is an explosive combination of that kind of insider buying and a stock that is heavily shorted, one that afn leads to a short squeeze that sends the stocks much higher. shorts are smart. in fact, a lot of the time they tend to be real smart, much smarter for the most part, i have found, than what we call long side investors. but they usually don't know more about a business than the insiders who run it. if a lot of people are shorting a zok and management is in buying it in sizeable amounts, then you should start doing some homework and usually you're going to want to side with management. then you can ride it higher and higher in true jackie wilson style. i recall the santa fe and coca-cola buys as being inside-like buys. the shorts panicked. they pushed the shares higher in a december pralgs to cover their positions and you make money. when a company with a heavily shorted stock announces a buyback, that's another line where management is

contradicting the shorts. companies often repurchase their own shares and while not all buy backs are bullish, i teach you how to identify the bogus buy backs in my bulletins at actionalertsplus.com. a substantial new buy back in the face of shorts is often a good reason to take a closer look at the stock. a note of caution here. you have to be very carefully when dealing with a company that's in the crosshairs of the shorts, especially when people are nervous and the market's in bad shape, the shorts have the ability to wreck a stock. these days, the shorts have more fire power than ever, i believe thanks in part to an sec that now under both democrats and republicans looks the other way when shorts raid stocks with bogus stories about accounting issue and management blunders. plus, it's pretty easy to do as a stock owners no longer have the benefit of rules that slowed short selling down and made it harder to create bear rates. rules like waiting for an uptick or higher price before you could

sell short stock. that was a good rule that somehow the government got talked into abolishing in order to make trading quicker and more fair for the shorts. a lot of good that did for us. it's a leading reason why so many home gamers have left the building. the rules were establishes to stop the fomenting of panic, but the government in all its wisdom think the panic is no longer possible. we have to be careful not to succumb to panic created by the short sellers. the shorts came back with aggressive negativity again and again after many of the big runs after the last few years, this time using weapons of mags destruction like double and triple etfs. when you're dealing with a heavily shorted stock, you have to learn to tread carefully. you can still find great opportunities in stocks where the shorts have overreached and

the insiders are buying. but before going into one of these situations, i have to warn you that the balance of power has shifted in recent years in favor of the shorts against regular individual investors. that means even if the short sellers are wrong short-term about a company's prospect or even long-term, they can still demolish the stock, especially if they mount campaigns against the stock like with herbal life and bill acman, the hedge fund manager. just don't underestimate the amount of damage the shorts can do, although remember the best protection against these raids is an offer from stocks that pay good solid dividends. short sellers have to borrow stock to short the stock, and that means they have to pay the dividends to the real owners. that's a terrific deterrent from those who are pernicious in the way they go about shorting. when you see a stock with a big dividend being attacked by shorts and dividend's going higher, what a terrific place to be, especially if the insiders are snapping up stock too.

bottom line, insider buying plus heavy short interest can equal raging buy as long as you avoid situations where the shorts are determined to crush the stock at any cost. think herbal life. speaking of herbal life, let's go to herb in florida, herb. >> caller: jim, great to talk to you. i'm an action alerts follower for the past few years. i wish i had gotten on board a lot sooner. >> you're very kind. some tough days. i like that you support us. thank you. >> caller: well, i'm recently retired. ie i've saved up well over my lifetime and i've looked at what the longevity of my savings. as long as i manage things well, i'm in good shape. >> good. >> caller: my concern right now is in al occasion. i have about 65% right now al oh cated in stocks, explicit about halfway between what i follow you with and the other half in index funds. >> okay. >> caller: and then the

remainder is split between bond funds and cash. you know, the cash fluctuates up and down. >> sure. you're doing it exactly right, just like we teach you in action alerts. >> caller: well, i've been m paying atengsz. >> you've got it dead riethsd. i have no criticisms. if anything, i totally endorse that. all right. trying to spot a raging buy? here's a tip. when you see insider buying plus heavy short interest and then a buyback and a dividend, wow, you got something. just be careful to avoid situations where the shorts are simply determined no matter what to crush not just the stock, but the business itself. stick with cramer.

i know the rap on me. at least among my critics. it's that i'm all about trading. that i don't have any advice that's worth while for regular investors, that i'm all short term. that's entirely untrue. this show has adjusted over time. it's morphed, so to speak. it's really about longer term investing, not trading. if you watched it anytime in the last five years, you know that. however, knowing how to trade certainly can make you a better investor. and trading around a core position is one of the most basic and useful disciplines out there. in markets like this one that have periodic swoons after very big considered runs like we've had since the bottom in 2009, it does help to trade around. what does it mean to trade around a core position?

first you need a stock. pick one you like, one you've got an opinion on, one where you have a bias. finding a stock that you believe will be going higher over the long term is what matters even as you accept the fact it could go down in the near term. what you're really looking for is a great company with a stock that could get tossed around by market volatility but that you ultimately believe will get higher if you're patient. you'd set up a position in stock, buying in increments because we all know buying at once is arrogance. why don't we use google as an example. i like that stock very much, have since it came public. although only over the long term will i tell you i like it because it's very volatile short term and given to quick pitfalls and declines. let a say you want to own 100 shares of google over time. the way to set up that position would be to buy 25 shares four times over a period of weeks or even months. that would be your core position. let's say you want to trade. i know many of you want to, but you feel discouraged because you

remember how all that amateur day traders got blown out when the tech bubble burst. the key word was amateur. you home gamers can make money trading if you do it right like a professional. in the old days when commissions were higher, that wasn't true. the commissions would eat into your profits, and it just wasn't worth while to trade. that hasn't been the case for ages. let's come back to our core long term position strategy. we own 100 shares of google, and we want to own it long term. let's say it's trading at $500 a share for the purpose of this show. every time the stock jumps 25 points or 5%, if you want to trade around position to preserve capital, you might want to sell 25 shares. you shave a little off to bring in some profits. so once google reaching 525, you would own 75 shares. you keep scaling out the same way although always i love the stock. i like to keep that last 25 shares. then you wait until something happens to knock the stock down to where you bought it as long as the news isn't specific to google, there by damaging google's prospects. it shouldn't be unreasonable given we're in a world where

stocks can get crushed by all kinds of factors that have nothing to do with the fundamentals. as the stock comes down, you buy it back in increments. since we started with 100 shares, let's keep using increments of 25. if google comes back to 500 from 575, you buy 25 shares, then another 25 down 5%. that is if you had sold. you can even take your winnings this way and buy 25 more if it keeps bgoing lower. this might appear to be small potatoes, but over time your profits can add up. remember, you don't have to do anything. you don't have to anything. you can just hold it. that is fine with me. but people ask me what trading around a core position, and that's what it's about. a lot of people think that trading is incredibly exciting, and it request be. but if you're good at trading around a core position, it's right to be bored. they're nothing exciting about the plan i just laid out. all you're doing is watch the stock move, trimming up or adding to your position. conjure the image of trading as

something as regularless and irresponsible. trading around the core position is the high of prudent portfolio adjustment. boring is good. excited, save it for the stadium. this whole tactic works best with stocks at lower prices where you can buy more stock and have more room to buy more. but i wanted to show you that it can work even with google, with a $500 stock. again, if you own a stock and you like it, you don't need to do anything. this is in response to many questions on twitter and in my career about how i used to trade when i was at my hedge fund. trading around a core. obviously you can scale these numbers depending on how big your position is. but the basic idea is to avoid putting yourself in a spot where you have too much on the table in case the stock gets swatted down or too little only the table to take advantage of any upside that comes your way. trading around a core position is a trading strategy that you can use even those of you who find the notion of trading, as opposed to investing, to be abhorrent. now, if you want to take your trading to the next level, i recommend there are two chapters on options in getting back to even for the strategy i used at

my old hedge fund. i used to think before options action, the tv program, that some of this material was too sophisticated for tv. i no longer think that, and you have to be willing to put in some extra homework. but if you have the time and inclination, it's more than worth the effort. the stock i use to demonstrate it happens to be google, and you can see how my strategy of what i called stock replacement in getting back to even works better with options than with the common stock. it's kind of like a cheaper and less risky why to what i call creating a google at a more reasonable dollar amount price than it currently sells at. this stuff is hard. but i am reacting to the requests i get all the time @jimcramer on twitter as many want to know about the options strategies i favor. we can't use options for actionalertsplus.com, so i'm old time on this stuff. they are all there for you to use. by the way, if you don't understand options at all, let alone the sophisticated strategies i lay out in getting back to even, in my first handbook, real money, that's a compilation of what i taught people who went to work at my hedge fund. i have what an option is, bottom

line. now you know the basics of how to trade around a core position if you're so inclined. yet another method to my madness, one that allows you to generate lots of small gains that add up over time. don't need to do it, but now you know how. stay with cramer.

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i've got one more trick to teach you tonight, one more method to my madness. this time i want to talk selling. >> sell, sell, sell.

>> which along with when you buy, what price you buy, may be the most important and definitely the most undervalued tool in your home arsenal. how do you know when to sell a hot stock? how do you get out before the party ends so that you're not one of the last people around who gets stuck cleaning up the mess? 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. but when you play the momentum game, you have to know when it's time to leave the table. that's what's crucial. there are always naysayers, and eventually the naysayers are almost always profb right as sooner or later virtually all hot stocks implode except for the ones that over time are able to develop into multiple business streams. this topping process happened big in recent years with stocks as diverse as chipotle and intuitive surgical or the cloud, e-commerce, smaller biotech stocks. it usually occurs later rather than sooner and all the negative talking heads who kept you out of the stock with their recklessness disguys as prudence caused you an opportunity to make money. people shy away from these

stocks because they don't know where they're going to top out. i'd be afraid to buy them too if i didn't have a discipline that let me know when to get out. lucky i do have one and you're about to learn it. when i talk about hot stocks, i really mean hot speculative stocks. usually they begin with little coverage and can go up for a very long time. they can catch fire and stay on fire for years without sponsor shm. the key to figuring out when interest has peaked and time to tell is watching the analyst coverage being rolled out. a good rule of thumb is once one of these hot stocks gets discovered and then has at least a half dozen analysts covering it, then the run is going to begin to peter out, not get stronger, because it's going to be too big and too well known to continue to go up the way it has. it's the rare stock that doesn't behave this way. you can find out how many guys are on a stock by looking anywhere on the internet. this isn't hard to fine information. this formula has worked for me as long as i can remember.

it works because the number of analysts on a stock is a good gauge of how much awareness and interest there is in a anywanamd names don't get hot followed and pushed by everybody. they got hot because they get discovered by everybody. hot stocks get tapped out when there's nobody left to be attracted to them, when all the people who would be interested in buying them have already bought. they came out of nowhere attracting more and more attention, more and more backers, and eventually everyone who wants a piece of the stock has a piece of it. when that happens, the run is eef over, and you must ring the register and go home. let me give you an example. hansen, the old monster beverage, which was one of the hottest stocks in 2004, hottest stock in 2 glou 5. hansen went from $18 and change at the beginning of 2005 to $200 when it peaked in 2006. the whole way up, there were people telling you that hansen was a fad, had to dry out, had

to crash. well, it did do that, but as often is the case, it took years for the momentum to run out, not days, not months, not weeks. years. i called the top in hansen back then because i know how these stocks worked. it peaked in july of 2006, and this was in part because of the fact that the company did a five for one split. and even though splits aren't supposed to do anything, this encouraged people who had been in hansen for a long time to take something off the table. but there was another reason i believed it would peak, and that was it picked up its forth analyst on may 10th of 2006 when goldman sachs started covering it. you had two months to sell between goldman's initiation and the stock's peak. prudence dictated that we sell once the stock had four analysts on it. better to clear out early with your winnings than to wait for them to fade away. and hansen, as with pretty much all the hot stocks, hot stocks started to cool off once it hit the analyst coverage. once hansen fell off the radar

screen, people stopped talking about and analyst coverage dwindled again. a stock i still like. it was an amazing renaissance but really a testament when analysts stop following a company, that the company's earnings start percolating again, as was the case with monster, a storied lazarus-like move can happen. it turns out that the fad drink ended up vanquishing the competition from major soda brands that failed to materialize, and the maltly the biggest one joined it rather than keep fighting it. but, again, as analyst coverage gained, the stock peaked. when they dropped it, the stock bottomed. that's how it works. let me give you the bottom line. small, speculative, steamy mott momentum stocks are worth owning, but you must know when to sell. use four analysts as a good rule of thumb letting you know when

to start selling. stay with cramer.

we've got to get some of the tweets you've been sending me @jimcramer, #mad tweets. our first tweet is from @jason, who asks what are some resources that you recommend for technical analysis as indicators for the novice? i get most of my technical analysis from real money.com. that's one of the thing i did in get rich carefully was pick the best technicians who explain what these terms mean and then show you them in action. that's what i did in that book. next a tweet from @red square 27, if i'm actively trading my roth, should i have my money in an index fund or stocks or both. stocks, my friend. bay the way, let's be clear.

that's not the case with 401(k), which is why i like the i.r.a. option so much more. next @hall g., jim, i've watched you daily for over ten years, daily. you are awesome. you have helped massive amounts of people. thank you. i cannot tell you there are so many people who come up to me, and they apologize that they want to tell me that they like the show. excuse me, jim. i don't want to bother you, but i like the show. no. when you say excuse me, i usually think you're about to say, boom. no, don't excuse yourself. i am absolutely thrilled that you say you like the show. it means the world to me. i sometimes figure what the heck do i come out here every night for other than the fact that you like it? @clear baffles tweets the following. @clear baffles? okay. please discuss balance between adding to a position and selling your cost basis. same apply to etfs or cost average. i like to lower my basis by selling. what i do is as the stock goes

down, i buy. and then as the stock goes up, i like to sell the higher basis. i run a charitable trust, so i don't have to worry about tax concerns. typically what i'm trying to do is lower my basis as an owner. why do i want to lower my basis? because i don't like chasing, and i do like buying at a discount. and lowering my basis is the equivalent of getting a stock at a cheaper price than i got it before. that means i'm getting a bargain if the fundamentals are still good. next, @jam cramer has more followers than wyoming has more people. wyoming has more oil than i have. wyoming minutes. @most underscore jeff asks our next question. i have a long list of research companies i like to invest in but don't have money for all of them. how do i narrow my list? this is very easy. what you've got to do is figure out, okay, which are the best at which levels? if you like them all, try to figure out what level would be the one where you'd really want to buy something and then stick

by it because once stock is coming down, people run from their levels instead of to them. stay with cramer.

a bull market somewhere. i promise to try to find it just for you right here on "mad money." i'm jim cramer, and i will see you next time.

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