How long do we hold a stock? (June 26, 2004)

  We will hold stocks as long as they are making money or are continuing the pattern/move that made us inclined to buy into it. Even for solid, well-performing stocks, the market can throw you a fast one when you least expect it, so our basic rule is that if the stock fails to make or continue the move that was the reason we bought it for or if it drops 7% to 8% below our purchase price we will sell it. That avoids the big loss when things get rocky, preserves our capital, and keeps us in the game.

That said, once we have invested and the stock has made the desired (initial) move, we like to let it run as long as it shows good price/volume action and no topping signs. This, of course, is done with an ever-present eye on market conditions. Seventy-five percent of stocks follow the market, and even though an issue may be outperforming the market, if the market pulls back, so might our stock as it follows the crowd. We like this rule of thumb: if you have a stock that is up 20% and it starts to sell back on rising volume, sell some positions and lock in some profits you already have. A sign that a stock is getting ready to sell back is if it races higher and then reverses, both moves on high volume and if the volume is higher than any high volume day when the stock was moving up. That's the sign of a climax run, and means a big sell-off is coming. Again, keep an eye on the market, too, for it can pull back a good stock prematurely in the midst of a solid run.

On the other hand, a leading stock will run higher and then make a routine pullback to test the 10 or 18 day EMA. It makes a series of runs higher, typically 4 to 5, after a breakout, forming little arrowheads or pyramids. We won't buy into these runs after the third bounce, and typically like to pick up the stock on the first test (our favorite) or the second test.

We like to track leading stocks on the reports for potential long term positions. If the market trends higher, these leaders will be the ones to provide strong returns once they reach breakout points. Stocks will rise and fall in their runs as described above, and we have to recognize when they are distributing through higher selling volume and reversals off of tops versus lighter volume, routine pullbacks to near support. On long term holds, violations of the 50 day moving average is a significant shift in character for a stock. If a stock can't recover over its 50 day EMA fairly quickly on good volume (which means that institutions are buying at the support level) we will typically close out a position. Of course, with options we will sell long before it fades that far; case in point is Friday when we took some interim gains on the way up.


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