With the market acting like a champ, and leading stocks doing what they’re supposed to do (LEAD the market higher), I thought it would be a good idea to …. are you ready for this? … talk about selling.
That’s right! Now that investors are getting a bit more giddy (gone are the fears of a financial collapse, although few are truly excited about the economy’s future) it’s a good time to review some selling rules and tools that will allow you to do what few investors do–make, AND KEEP, good profits.
I’ve written about a few of these tools before, but I think now’s a good time to review them, and to shed some light on what works well for me.
#1 Use the 50-day moving average: If you’re investing in growth stocks, and you buy during normal pullbacks (as opposed to after a stock’s skyrocketed for a few days), selling on a decisive break below the 50-day line is probably as good a sell rule as you’ll get. Sure, sometimes you’ll get shaken out of an uptrending stock, but more often than not, the 50-day will provide a good trailing stop-loss level for your stock.
#2 Engage in some Offensive Selling: Too many investors make an investment and stick with it through hell and high water. That might sound brave, but it’s not a great way to make money. For most investors, selling is hard to do, so my advice is to sell small amounts (maybe 10% or 20% of your shares) should your stock have a few good days in a row, and you have a decent profit. If you sell some offensively (on the way up), it can cushion you a bit from the inevitable correction.
#3 Sell Some on Weak-Volume Rallies: Watching volume is a must for the serious investor. If a stock you own has already advanced for many weeks (or months), then suffers a huge (at least 100%, sometimes 200% or more above average) volume decline, that’s a red flag. If it then rallies for a few days on much weaker volume, consider selling some shares on the second, third or fourth day of the bounce.
#4 Don’t Ignore Market Timing: When our Cabot Tides (one of our trend-following market timing measures) turn negative, it needs to be respected. So you should sell about 10% to 20% of your portfolio right away–so if you own 10 stocks, sell a stock or two. Or, if you’re fully invested, try to raise 10% to 20% in cash.
#5 Beware Sloppy Action: Granted, this isn’t a hard-and-fast rule, but we’ve noticed that, if a stock has advanced strongly for many weeks, and then starts gyrating wildly–up 5 points one day, down 5 the next, then rallying 7 the day after, followed by a 4 point decline, etc.–it’s a sign that the bulls are bears are battling it out. You should usually let go of some of your shares during this period, as a correction is possible.
In general, my rule of thumb is this: Force yourself to do a little (not too much!) offensive selling when your stocks are up a few days in a row and you’ll feel like a genius. I’ve found that taking a little off the table here and there does a lot not just for your wallet, but also for your psyche–it allows you to hold on to your remaining shares longer, waiting for a break of the 50-day line (which can be 20% or more off the stocks’ peak).