Explosive growth and continued demand driven by the artificial intelligence boom have driven shares of Nvidia (NVDA) to record heights. But as earnings season ushers in a mixed bag of results for fellow Magnificent Seven stocks like Meta Platforms (META), Microsoft (MSFT) and Alphabet (GOOGL), Nvidia stock has come under pressure ahead of its report on Nov. 20. And Amazon.com (AMZN) and Apple (AAPL) have just unveiled their latest numbers.
While shares of Nvidia — down nearly 5% Thursday — remain within 6% of its 140.76 buy point, the combination of the stock’s already huge run, pressure in the Nasdaq and Nvidia’s upcoming earnings all trigger questions about how to handle the AI giant. The stock has also just lost support at its 21-day exponential moving average.
In the ying-and-yang world of Wall Street, investors need rules for both how to buy stocks and when to sell stocks. So with an eye on the principles of risk management, don’t ignore the eight “secrets” of selling and how they apply to Nvidia and others.
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When To Sell Stocks: FOMO Vs. FOMU
As well as anyone, investors understand FOMO — the fear of missing out. When a hot name like Nvidia notches one record high after another, anyone who doesn’t already own shares gets tempted to jump on that bandwagon before it gets away. That can cause some investors to blindly dismiss proven rules for buying stocks.
Meanwhile, investors already sitting on big gains in Nvidia, Meta and other high-flying growth stocks experience a different type of fear — FOMU, or the fear of messing up. That is, the desire for even bigger gains begins to battle the fear of seeing those earlier profits significantly shrink or even disappear.
Nvidia stock provides a prime example. The AI leader rocketed 1,202% from its low in October 2022 until hitting a record high in June of this year. Nvidia’s breakout in May was from a third-stage base. It went on to break out from another late-stage base earlier this month after weathering a spout of volatility, a common occurrence as big winners start to get long in the tooth.
Such later-stage patterns entail more risk. By definition, a stock has already made a big move by the time it forms such a setup.
That does not mean Nvidia will not shake off its current pressure and keep climbing. It very well could. But as stocks like Nvidia start to wobble and become more volatile after huge gains, investors should remain vigilant about staying safe and locking in profits. An upcoming earnings report adds an extra element of risk.
How To Sell Stocks: Scaling Out Of Winners In Phases
Risk Management — One Pillar Of The IBD Methodology
IBD’s recommended market exposure level provides one way to gauge how aggressive or defensive investors should be. This five-tiered system highlights the importance of risk management, one of the four pillars of The IBD Methodology.
Click here to see the current recommended level and monitor any changes.
When changing market conditions emerge — for better or worse — monitoring action around moving averages in indexes and individual stocks is a key factor in determining when to sell or sit tight.
8 ‘Secrets’ For When To Sell Stocks
It’s easier to be objective when it comes to deciding what stocks to buy. Before you invest money, you can use stock lists, a stock screener and stock ratings to identify the best stocks to buy and watch.
But once you own shares and have skin in the game, your psychology changes. Emotions of both greed for big gains and fear of big losses kick in. These emotions can cloud your decision-making. That makes it more difficult to keep an unbiased, objective view on when to sell stocks.
To stay grounded and in the right mindset, keep these eight “secrets” in mind.
- Everyone makes mistakes. Just be sure to cut all losses short.
Even the best investors get hit with a loss from time to time. But they don’t indulge in worry as the stock drops even further. They cut their losses quickly and move on. Leave your ego and pride at the door. Don’t let a loss get to you — either mentally or financially. - If you don’t sell too early, you’ll sell too late.
To lock in solid gains, sell while your stock is still going up. As IBD founder William J. O’Neil said, “Your objective is to make and take significant gains and not get excited, optimistic, greedy, or emotionally carried away as your stock’s advance gets stronger.” Following the 20%-25% sell rule can help you do that. In a strong bull market, leading growth stocks like Nvidia, Meta, Microsoft and Apple can, of course, run longer than expected. But locking in some profits along the way allows investors to safeguard a portion of those gains, while still maintaining a position to take advantage of a continued run. It also reduces the risk of giving back too much in an extended pullback. - Have a sell plan in place before you buy.
The real drama kicks in when it comes time to sell. If you don’t have sell rules and an exit plan, it’s easy to freeze and not take action when needed. If your stock is soaring, you might get greedy and ignore certain sell signals and warning signs. Also, if you’re sitting on a loss, you may do the “hold and hope” routine. You pray it bounces back — while it continues to drop. Stay grounded and keep your emotions at bay by having a selling plan in place ahead of time. Write down your target sell prices for both taking profits and cutting losses. - Don’t let a decent gain turn into a loss.
If you have a nice gain of, say, 10%, 15% or more and the stock begins to decline, don’t let that profit disappear completely. It’s much less frustrating to see a 15%-20% gain turn into a 5%-10% profit than to see it turn into a 10% loss. You can always buy the stock back if it shows renewed strength and forms a proper buy point. - Don’t marry your stocks. Just date them!
“For better or for worse, for richer or for poorer” is a noble and time-honored approach to marital fealty, but it’s a bad idea when it comes to investing in stocks. In most cases, it’s better to take a good gain while you have it. And never hesitate to separate and protect yourself from a bad relationship if there are clear signs of trouble. - Sell your losing stocks first.
When building a winning basketball team, you wouldn’t trade away all your top players for a bunch of benchwarmers. Yet many investors do just that. They sell stocks in which they have a good gain and hold those showing a loss. Further, they think a big gain is just around the corner. That’s usually just wishful thinking. Do the opposite. Sell your losers and use that money — provided the market trend is favorable — to add winners to your roster or invest more money in the top performers you already own. - When buying a stock, focus on both the fundamentals and the stock chart. When selling, focus on the chart.
They say the view is great at the top, and that often applies to stocks as well. The warning signs typically show up in the stock chart — i.e., technical analysis — before they appear in the company’s fundamentals. It’s crucial to use both technical and fundamental analysis when buying stocks. The same is true on deciding when to sell stocks. Focus on the chart and technical analysis, like price and volume action and behavior around key moving averages. - The most important sell rule is to buy at the right time.
A very common mistake, particularly for beginning investors, is buying at the wrong time. Some will not pay attention to market timing and buy during a market correction when most stocks go down. Or they’ll ignore the technical action in the stock chart and either buy too soon or too late. So before buying a stock, make sure three key factors — market trend, big earnings driven by something new, and institutional support — are in place. Doing so helps get you in at the right time, with the odds of success squarely in your favor.
Follow Matthew Galgani on X (formerly Twitter) at @IBD_MGalgani.
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