September 28th, 2010

Tech Stocks In Parabolic Moves: When to Sell

Following up on my last post about the potential of an inverted head-and-shoulders in the NASDAQ Composite Index I took a look at a wide range of individual tech stocks across all sectors including software, semiconductors and equipment. I can’t explain it but I like it. Many of these stocks, in their attempt to make up the ground lost since their bubble burst in 2000-2003, are seeing parabolic moves.

If you were a subscriber to Instant Alerts, you may be in some these stocks by now. Here are some of the stocks we purchased, when and the amount of increase since:

With 20%+ gains in less than two months, the logical question is “When do we sell?” As difficult a rule as it it is to follow, I try to sell only when:

  • the market is going into a severe decline (that is, when my market timing indicator points to a major correction or crash) or
  • sell a small portion off because the position has become too large a percentage of your portfolio and you need to rebalance or
  • soon after you bought it but the chart failed to perform as expected for some reason or
  • you found something you think will move higher and faster but don’t have available cash so you have to sell to generate funds or
  • the company reported an underlying fundamental problem or change (like improper reporting, top management change, etc.) that causes the stock to drop.

Some investment services instruct their subscribers to sell if a stock quickly appreciates 25% or sell a portion (or in Cramer’s parlance, “schnitzel some”) when the stock hits a predetermined price objective.

I’m sorry, I just don’t subscribe with these mechanical approaches. Great stocks are hard to find. When you happen to buy one (primarily because of great looking charts, of course) and you have market tailwinds at your back, there’s no reason whatsoever to sell. If the industry sector is hot and the herd is stampeding to put money to work in it before the end of the quarter or the year, there’s no reason to sell. Why dump something you known and try to find something to put your money in that you don’t know. The only one who has a 100% certainty to make money on that trade is your broker.

If you’re a mutual fund and have hundreds of thousands invested in one stock, then it takes time for you to lighten up so you have to take incremental steps. But the average self-directed individual investor can usually unload a position merely by pressing the return key on their computer.

As individual investors, our challenge is more risk management than it is portfolio management. It’s not so much what we have our money and how diversified the portfolio than it is balancing the probability of gain against the risk of loss. The question always is: how much do we want to have at risk invested in the market at any particular time vs. having sitting safely in cash on the sidelines?

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  • Anonymous

    I agree. People who follow Cramer's advice are on the wrong end of the trade at the highs and lows for a particular stock. He likes to buy when a stock has momentum down and sells when it reaches a higher $$$ than what he bought it for. Even taking half off to buy a sweater is foolish when the surge is up!

  • Trading Ibex

    If you wanna see interesting technical formations in bluechips, you can have a look at spanish IBEX35.

  • oa92000

    Got my TNA @32 couple of weeks ago, not sure when to take profit???


  • Joe

    OA, good work. I can't tell you when you should take your profits but if I had made your trade, I would probably stay in the trade hoping it would make it into the low 60's. Rather than buying puts which are very expensive (a 3 month put with strike price of 45 costs 8-9 which you wouldn't break even on until 37…a nearly 21% premium today's 47 close), I'd put in a stop loss order at about 40.)