Decade after decade, new bull markets serve up big, new market leaders. Excellent fundamentals and increasing mutual fund ownership serve as catalysts for huge gains for select stocks. But all good runs eventually come to an end, and a sharp investor knows when to sell stocks — either to take profits or to keep losses small.
XWhat causes a stock's run to end? By and large, it's institutional selling — when fund managers decide to liquidate large positions and take profits after a big price run.
So after a stock's lengthy run-up, it's always important to watch for signs of heavy institutional selling.
When To Sell Stocks: Utilize This Stock Chart Tool
For a market leader, the 50-day moving average, which computes a running average of price closes over the past 50 trading sessions, can act as a support level during an uptrend. But it can also act as a resistance level during a downtrend.
If a stock breaks below the 50-day line (drawn in red in all IBD Charts and in MarketSmith) in heavy volume and can't rally back, it's often a signal that buying demand is drying up and the stock's run is ending. Keep in mind that one or two bursts of institutional selling can often presage more dumping ahead. Sometimes, it can take a fund several weeks to exit a position.
Studying the price action of former market leaders just before they broke down can help you act quickly when a current leader you own starts to falter.
When To Sell Stocks: The Signal In Deckers Outdoor
After a huge breakout in April 2003, Deckers Outdoor (DECK) rode its 50-day line higher to a monster gain. Its price action wasn't a fluke. Big funds were accumulating the stock in anticipation of continued strong demand for Deckers' Ugg boots.
After an initial breakout below 10, Deckers eventually stormed to an all-time high near 25 in January 2004. It also cleared a series of bases before topping out at 49.12 in late December 2004.
In January 2005, the first signs of institutional selling started to appear. Big percentage declines in heavy volume are a telltale sign that institutions are unloading.
On Jan. 6, Deckers fell 7% and dropped below its 50-day line in volume 170% higher than average (1). Two days later, it tried to reclaim the line but reversed in big volume (2). It was time to sell.
In February, Deckers was repeatedly turned away at the 50-day line. Clearly, buying demand was drying up.
Finally, it staged a spectacular reversal on Feb. 24 (3), yet another sign of institutional selling. By April, the stock lost nearly 58% of its value.
In some cases, a great stock will punctuate the end of a rally with multiple sell signals, covered frequently in IBD's Investor's Corner and daily market columns. Check out this article on how to spot multiple sell signals to lock in profits and raise cash to maximize your portfolio return.
A version of this column was originally published May 2, 2013, and has been updated. Follow Shreve on Twitter at @IBD_KShreve for more on stock market analysis and insight.
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