When an uptrend continues week after week, investors eventually become fully invested.
In that situation, a sell strategy is critical. What stock should be sold first and for what reason
The first step in answering that question is to divide your portfolio into three groups by price progress — losers, so-so performers and true winners.
Then evaluate each group.
• Losers: Losers come in different shapes. If a stock is 7% to 8% under your purchase price, these should be sold immediately, no exceptions.
If a stock is approaching the 7% to 8% loss, you need to ask why you are holding it. Are you merely wishing to get out even? These could be candidates for selling.
If a stock is lagging the S&P 500 (i.e., the RS line is falling), you need to ask why you are holding.
If the stock is a recent purchase and has fallen 3% to 5% below your , take a look at the stock's history. Does it make a habit of struggling after a , then finding traction? The stock's character can help you decide whether you should sell before it's down 8%, or if you should give the stock more time to work before it triggers a sell rule.
• So-so performers: Perhaps you have some stocks that appear to be moving in line with the market. These can be sell candidates. Why would you sell if they haven't triggered a sell rule? Perhaps you need to raise money to add more exposure in your best performers.
If a stock looked like a true winner but now threatens to turn negative, sell. It's unpleasant to sell a stock that perhaps was up 12% to 15% two weeks ago and now is up 3%, but you need to protect gains.
• True winners: This group should be subdivided into two parts. If a stock shows signs of becoming a great stock — by gaining 20% in the first two or three weeks after a breakout — then this is the stock that you need to hold eight weeks and look for secondary buying opportunities if it continues to act like a big winner.
Most winning stocks, though, fall into a lesser category. After a 20% to 25% gain, you should take the profit. Most stocks will begin consolidating after such a gain.
Don't worry if the stock rises more after you sell. Successful investing isn't about perfection.
Sometimes people get in the habit of not selling a stock until they spot something better. Instead, judge each stock by its merits. Let the market identify your next buy candidate.
As an uptrend matures, the market will offer fewer opportunities. This is natural. Take it as a cautionary factor. A rising cash position isn't necessarily bad.
The overall goal is to divert money from weak performers to strong performers. And when the market turns south, cash outperforms stocks.