This week on the "Investing with IBD" podcast, we discussed the importance of profit-taking strategies. With the stock market pulling back amid trade war fears, it's key to make adjustments to your portfolio. By learning how to sell stocks at the right time, you can make sure you're locking in gains before they fade. We looked at Atlassian (TEAM), Tandem Diabetes Care(TNDM) and Shopify (SHOP) to explain IBD's profit-taking rules. Broadcom (AVGO) and Tradeweb (TW) are top stocks to watch.
Current Stock Market Conditions
Amid the potential threat of an escalated trade war, the stock market is coming under selling pressure. But with the strong gains we've seen so far in 2019, a pullback has been expected — and a consolidation would be considered constructive as it would provide investors with more buying opportunities. Investors should closely monitor stock market conditions to see if the severity of the selling continues to worsens. That would signal the market has entered correction mode.
How To Sell Stocks At The Right Time
The pullback is a perfect reminder of the importance of learning how to sell stocks at the right time. As IBD Chief Content Editor Chris Gessel notes in this episode, the time you need to take profits is probably the time you least want to take profits. When your portfolio is up big, it's tempting to want to hold in the hopes of further gains. But it's at that exact point that locking in profits is key.
IBD's primary profit-taking rule says to sell part of your position when a stock climbs 20% to 25% above a buy point. Our research shows that it's at this time that stocks tend to pull back. But you don't necessarily have to sell your full position. If you're bullish on the stock and it isn't flashing any weakness, taking partial profits is a sound tactic. A violation of the 10-day moving average can also be used to help investors figure out when to exit, or sell a portion of, their position.
When the stock market comes under pressure, it may be necessary to sell the weaker stocks in your portfolio and watch your winning stocks very closely. And when the market is in a correction, that's not the time to be buying stocks. Make sure to sell stocks that flash sell signals, and be quick to take profits.
Atlassian stock, Tandem stock and Shopify stock are all great examples of how to sell stocks using IBD's profit-taking strategies. Basic analysis and charts are below, but make sure to listen to (or watch) the full episode for the crucial details.
Atlassian stock is a great candidate for the 20% to 25% profit rule. While Atlassian stock is continuing to surge to new highs, selling into strength is never a bad idea. Again, just because a stock has risen more than 20% to 25% beyond a buy point, that doesn't mean you have to take everything off the table.
Tandem stock gapped out of a base on its February earnings report and extended its gains from there. This is a great example of how investors could use the 10-day moving average and try and stretch out their gains. After closing under the 10-day moving average, Tandem stock proceeded to correct as much as 31%. If investors held this stock through that instead of take profits, the stock was up less than 12% from the original buy point at the low of the new base.
Shopify stock is now 48% above a 176.70 buy point from a consolidation that was cleared in February. Now Shopify stock has the look of going vertical. If you didn't take profits before, this would be a great time to sell into strength and book at least some profits, depending on your conviction. No need to wait for a violation of the 10-day moving average.
Broadcom stock and Tradeweb stock are showing compelling chart action in the face of market headwinds. With Broadcom stock pulling back to its 10-week moving average, this could present a buying opportunity.
When a stock pulls back to the 10-week line in heavy volume after a breakout, and rebounds from that level in heavy volume, that's a chance for existing shareholders to add to their positions. Broadcom stock rebounded from the 10-week on Thursday, but volume was below average.
Tradeweb stock is working on a four-week IPO base with a 44.35 buy point. Shares are currently trading 7% below that level. Tradeweb stock has strong earnings and sales growth. Sales have been accelerating over the past year and hit 56% growth last quarter. Big sales growth, usually well north of 30%, has been a hallmark trait of tradeable IPO stocks.
This week's podcast episode finished off with an interview from our podcast sponsor, AllianceBernstein. Randy Watts of William O'Neil + Co., who has been a guest on the podcast, interviewed AllianceBernstein Market Strategist Rick Brink about investing strategies for later in the economic cycle. Don't miss it.
Make sure to tune in next week, when host Irusha Peiris interviews successful growth investor Mark Minervini about where he thinks the stock market is headed and how he handles position sizing for his trades.