PowerTrend Brief: Knowing What and When to Sell Amid New Stock Market Highs

With the Dow Jones Industrial Average at record highs and the S&P 500 not far away from setting a new all-time high itself, I find investors are doing two things. The first is enjoying the rally and counting their gains on paper. The problem is that those paper gains mean very little in the investing and trading world because they can disappear as quickly as they appeared. What matters is booking gains and ringing the register.

In my investment newsletter PowerTend Profits, I’ve had subscribers booking double-digit percentage gains to the tune of 20%-30% during the last few weeks by trimming back their holdings. Not selling out of positions all at once, but rather selling some holdings now and some later. That technique is used by mutual fund and hedge fund managers to maximize their returns.

A great example of that strategy involved fragrance company Inter Parfums (IPAR) that I advised subscribers of PowerTrend Profits to buy last September at $17.79 as part of my Rise and Fall of the Middle Class PowerTrend. I recognized that Inter Parfums would benefit from rising disposable incomes in the emerging markets. PowerTrend Profits subscribers rang the profit bell when they sold half of their position at $22.49 for a 26% gain, and then again when we closed it out at $24.99. All told, that two-pronged sale led to a 33% return for them.

Knowing When and What to Sell

The second thing that professional investors are doing as the market indices enter overbought territory is identifying which positions they should exit. That’s the case if it’s a winning pick or a dog of a position. Like those mutual fund and hedge fund managers, I watch a number of metrics and indicators to gauge when a position is getting a little too rich for its own good.

The fundamental checks that an investor needs to scrutinize range from industry and company analysis to revenue and earnings growth to examining current and past valuations to determining potential value of a security to deciphering a company’s balance sheet. Some investors favor technical analysis, which hinges on examining a stock’s price chart amid a number of price trend indicators to determine potential entry and exit points.

Watching Insider Selling For Clues

While there is no magic silver bullet, one metric that I watch is insider buying and insider selling. Insider selling tracks the selling of a security by those who have access to material nonpublic information about the investment. Insiders tend to be members of a company’s management team and board of directors. In other words, they are folks that tend to be in the know. Over the years, I’ve watched insiders sell stock and it can be a harbinger of what is to come.

In 2009, for example, retailer J. Crew had a lot of insider selling. Sellers included CEO Mickey Drexler and Tracey Gardner, the company’s president of Retail & Direct. Between the two of them, they sold not thousands of shares but tens of thousands of shares and pocketed millions. During that time, the shares of J.Crew, which traded under the ticker JCG at the time, fell from $50 to the low-$30s. If you were on the wrong side of that trade, it was pretty painful to watch insiders booking huge profits along the way.

That’s but one example. Generally speaking, however, the ratio of sales versus purchases by chief executives, directors and senior officers at S&P 500 companies is more than twice the 10-year average ratio of 5.4 according to data compiled by Bloomberg. Some companies with big insider selling include TRW Automotive Holdings (TRW), Kosmos Energy (KOS), J.C. Penney (JCP) and Primerica (PRI), among others.

Insider Buying is a Nice Confirmation

While insider selling is a warning, insider buying can be a confirming sign. While it’s not the only thing I look for when recommending a stock to PowerTrend Profits subscribers, it sure is nice to see occur in a company I am recommending. One such PowerTend Profits position is Mondelez International (MDLZ), which saw a director increase his position size by 46% in late February. Had he been a subscriber to PowerTrend Profits, he would have been scooping up those shares at an even better price.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.