May 28, 2012

Rackspace Shows Why It's Best To Take Profits - Yahoo! Finance

Sell Winners Like A Pro: First In A Series Greed, one of the Seven Deadly Sins, is defined as an excessive pursuit of wealth. But investors who sell a stock after a 20%-to-25% gain can avoid that sin while also making a nice profit.

The 20% sell rule marks the first part of a nine-part Investor's Corner series that will examine strategies to help shareholders maximize profits.

These offense-style sell rules require the investor to sell into strength, locking in gains while a stock is rising and looking strong. Doing so also prevents a smart gain from turning into a loss, as all stocks eventually correct, sometimes sharply.

"The object is to make and take significant gains and not get excited, optimistic, greedy, or emotionally carried away as your stock's advance gets stronger," William O'Neil wrote in "How To Make Money In Stocks.

It's understandably frustrating to watch a stock go higher after you've sold it, but ignoring your sell rules and just hanging onto the stock can backfire. It's impossible to know whether a stock will continue to go higher. Stocks tend to pull back after rising 20% to 25% above a proper buy point. That's true even when the market is in a confirmed uptrend.

Rackspace Hosting (RAX - News) offers a tale of caution. The cloud-computing firm cleared a 45.55 buy point from a cup with handle on Feb. 2 1 and climbed 33% to a record high of 60.55 on May 3 2.

Volume on its record-setting day was high, a bullish sign (please see a daily chart). Investors who had sold after a 25% gain may have regretted missing out on an even bigger profit.

But Rackspace began edging down in heavy volume the next two days, setting up a 9% plunge on May 8 that took the stock well below its 10-week moving average 3. The steep drop reinforced why it's important to take profits after a 20% to 25% rise.
"You'll never sell at the exact top, so don't kick yourself if a stock goes still higher after you sell," O'Neil writes.

At its nadir, Rackspace gave up just about all of its gains from the breakout. Still, those who had obeyed their sell rules would have avoided a gut-wrenching roller-coaster ride.

An exception to the above rule would be if the stock were to jump 20% within three weeks after its breakout. Such stocks are rare, but they appear in every bull market and should be held for at least eight weeks. That's because stocks that break out in heavy volume and rise sharply in a short period of time have the potential to double, triple or go even higher.

But for the vast majority of stocks, it's best to take at least some profits after a 20%-to-25% run up. You offset losses elsewhere and build fresh cash to invest in other potential winners.

by Investor's Business Daily May 21, 2012

Rackspace Shows Why It's Best To Take Profits - Yahoo! Finance

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