When To Sell Stocks: How To Sit Tight In Big Winners Such As Chipotle, Microsoft, Cisco Systems (2024)

If you have a winning stock in hand, you might think about this question: How long should I hold the stock? Could this one become an exceptional moneymaker? Indeed, there's no easy answer to the resolving the issue of when to sell stocks.

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Numerous factors matter. One, it depends a lot on what point you began to invest in the market cycle. A bull market tends to last two to four years. The big money tends to be made in the first year or two.

In most cases, profits should be taken when a stock rises 20% to 25% past a proper buy point. Then there are times to hold out longer, like when a stock jumps more than 20% from a breakout point in three weeks or less. These fast movers should be held for at least eight weeks.

After those eight weeks pass, the next step is to study the stock's chart and see if it is holding up well. If so, and the market is rising, chances are good the uptrend will continue. You hold. Later on, a new breakout may send shares even higher.

For true market leaders, the typical time from a breakout price to peak ranges from 12 to 18 months.

But when you truly have something special in your hands, you have to give it even more room to bloom.

"If you really know and understand a company thoroughly and its products well, you'll have the crucial additional confidence required to sit tight through several inevitable but normal corrections," William O'Neil, longtime chair and founder of IBD, wrote in "How To Make Money In Stocks."

When To Sell Stocks: The Art Of Holding

In the 1923 classic "Reminiscences of a Stock Operator," author Edwin Lefevre profiles the extraordinary trader of the early 20th century, Jesse Livermore. Lefevre quotes Livermore as saying, "After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that the made the big money for me. It always was my sitting. Got that? My sitting tight!"

"I have repeated the mistake of grabbing at small profits and selling at a targeted round number over and over in my speculative career," wrote Victor Niederhoffer, a futures expert and former currencies trader for the former hedge fund titan George Soros, in the 1997 autobiography "The Education of a Speculator."

"I believe many others make this same error.The reason: Many players set their sights at certain reasonable targets. Fast-moving operators, aware of these targets, come in just ahead, ready to take the other side, knowing that there will be considerable pressure to offset at prices not much worse than current. This pressure usually drives the price away from the target. But if the price can overcome these operators and reach the target, something big is about to happen," Niederhoffer added.

Staying with a stock for some time will allow gains to compound, especially if you can locate follow-on entry points and add shares when it breaks out anew.

In a general bull market, winners may be held for years. One of O'Neil's huge winners, Pic N Save (now known as Big Lots (BIG)), was held for more than six years.

Two Giant Winners In Tech Land

Microsoft (MSFT) was a gigantic winner from the late 1980s through the late 1990s. With its dominant position in operating systems and productivity software, its stock skyrocketed from a split-adjusted breakout near 90 cents in September 1989 to its high of 119.94 in December 1999.

Cisco Systems (CSCO) soared 75,000% from an initial buy point in late 1990 before finally topping in March 2000. The networking titan had huge earnings and sales gains as well as juicy profit margins and a high return on equity.

Both Microsoft and Cisco Systems were among the best at what they did. Both companies also benefited greatly from the tech and internet boom.

Returning To Leadership In The Restaurant Sector

Chipotle Mexican Grill (CMG) was a big market winner after the stock market bottomed in March 2009. After the 2007 to 2008 bear market, the stock bottomed before the market did so in March 2009. The stock later broke out to 52-week highs in January 2010 and ran up 348% before topping in April 2012. It built a series of bases along the way.

The firm delivered quarter after quarter of double-digit earnings and sales gains, thanks to its simple menu of fresh, higher-quality ingredients.

When did the stock show a major sell signal?

In late July 2015, Chipotle broke out of a long saucer base. It had one major flaw: Most of it formed beneath the 10-week moving average. Gains were scrawny after Chipotle moved past a 728.07 entry, exceeding no more than 4%.

Learn Key Sell Rules

Starting with the week ended Oct. 16, 2015, the restaurant play slumped six weeks in a row, falling in heavy volume and crashing through its 10-week moving average and then taking out its 40-week line — two critical sell signals. (Go to a historical MarketSmith chart to see this specific time frame.)

A third sell signal? It easily fell 8% below the buy point of 728.07.

Those who sold on any of those signals would have saved a lot of money; Chipotle went on to battle its worst PR crisis as customers across the country got sickened by tainted ingredients throughout the second half of the year.

A new strong breakout didn't emerge until January of 2019.

A version of this story first appeared in the March 20, 2013, edition of IBD.Please follow Chung on Twitter at @SaitoChung and @IBD_DChung for more on growth stocks, buy points, breakouts, chart analysis and stock market analysis.

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