MLR - You have profits in names we've suggested. Now what?

We've received a number of questions from members who have bought some of our recent suggestions such as JAZZ, INVN, ALXN, and SIMO. The concern is that now that they have profits, should they sell since the market has been trendless for about a year, and profits made quickly evaporate by holding onto the position.

The answer is that the few big gains made should offset the small losses, provided one sticks to their sell stops which should not exceed sound risk tolerance levels. While trendless markets can create drawdowns, it is important not to lose sight of the big goal, which is to capture big gains on just a handful of positions. In a year such as 2011, such big gains were very few and far between. Big gains achieved in trending names such as MCP, GLD, SLV, DGP, and AGQ more than made up for all the small losses in 2011.

So should you prematurely sell names to capture profits in an uncertain, trendless market? The answer is that this can create the bad habit of selling prematurely and missing out on the big gain. In addition, who is to say the market won't start trending now. New trends, either up or down, often begin when least expected. Think March 2009, September 2010, the flash crash of May 2010, or the downslide in August 2011. Also, in terms of uptrends, if even one of these names continued higher allowing one to pyramid or capture a sizeable gain, that should still result in net profits even if the other names had to be sold at breakeven or small losses.

Take QCOR for example. It had a buyable gap up which then quickly turned into a loss the very next day. As we have suggested, it is prudent to set your stops just below the low of the gap up day, typically 1-2% under the low to allow for porosity or a temporary market pullback. Also, if the gap up occurred after the stock came straight up from lows, it may still be a legitimate buyable gap up, but a pullback of some percent (contextual to its chart pattern) should be allowed before the stock makes its way higher.

In terms of handling positions in one's portfolio, the handling of positions is always contextual thus subject to many subtle nuances of the stocks themselves as well as the general markets. Such subtleties can alter positioning and exposure on a real-time basis, thus what I or Gil expect to do today, may change tomorrow. In other words, there is no black and white answer, but that is what keeps investing fun and dynamic.

As an aside, the homebuilders group has shot up from 148th to 57th place out of 202 groups over the last 5 weeks. More than half the names in this group are now sporting relative strengths above 90. LEN had a surprisingly robust quarter, and the view is held that homebuilders have put in a significant bottom. With interest rates kept at record lows for potentially the next 2-3 years, this could provide an opportunity for home buyers to lock in historically low rates on their home purchases, thus could spur the building of homes to meet increasing demand. But the economy is still relatively stagnant, and many cross currents abound, so speculating on where the group could go means little while focusing on price/volume action in the present is far more important. Should we see opportunity in individual names in this group at precise buy points, we will send out emails in real-time as we do.