December 5th, 2010
A few weeks ago, in “My ‘Sell Rules’ Discipline“, I very confidently stated that
“Stocks with momentum that have appreciated substantially will tend to continue moving up. Stock retreats brought on by market consolidations may actually be an excellent time to the position size of winning stocks. In short, decisions to sell stocks should be the exception rather than the rule…”
What I didn’t expect was that I’d be faced with the quandary of whether or not to sell a strong momentum stock so soon. But the strong market over the past several weeks have placed several recently purchased stocks in exactly that situation.
As subscribers to my Instant Alerts know, as of Friday, 85% of the 85 stocks of the stocks in my portfolio show gains since their purchase and 75% have appreciated more than the S&P 500 since their acquisition.
The reason I bought most of these stocks was: 1) the market was clearly approaching an “all-in” signal and 2) these stocks were trapped by “New All-Time High” or “Stocks on the Move” scans. They were breaking across long-term resistance trendlines with many moving into all-time new high territory. Several have had stellar moves in a short time:
Take CEVA as an example (click on image to enlarge):
CEVA has been like a rocket since crossing above its resistance trendline into all-time new high territory gaining 69% while the S&P 500 has risen 12%. According to my “Sell Rules”, its sale would be dictated by a market correction, abandonment of the industry group by the “herd” or some event endemic to CEVA itself …. something other than the fact of its astronomical rise.
Some could argue that I should have avoided being “piggy” and sold all or a portion of the stock on October 25 at a 25% or November 5 at a 50% gain; now at 69%, continuing to hold it would clearly be suicidal.
How about ICO? After purchasing it on August 5 at 5.04, a sale on October 12 would have netted nearly 20% or on November 19 a clean 40% gain. Continuing to hold it with a 59% gain would again be no less than marching off to the slaughter house.
One technical “rule of thumb” for identifying price objectives is to place the breakout level (neckline, resistance trendline, etc.) at roughly the midpoint between the trough and a peak. In CEVA’s case, with a trough at around 5.75 (measured from the March 2009 lows) and the breakout trendline at 12.75, the price objective could be around 28.25 (12.75/5.75 x 12.75 = 28.25); for ICO, the price objective would be around 12.5 (5/2 x 5). Of course, the tough part is picking the trough and breakout points that’s why I prefer broader “zones” instead.
Am I acting foolish? What would you do? If you had sold, what would you have done with the proceeds? If you sold Monday (all or a half), what would you do with the money? I think what I’m going to do is go back to the charts and come up with some price targets …. assuming the market continues advancing into 2011.