If You Own These Stock Sectors, Tighten Your Stops!

by: Marc Courtenay

Whatever method you use to pick stocks...your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed. It isn't the head but the stomach that determines the fate of the stockpicker.

-- Peter Lynch, Legendary Fidelity Magellan Portfolio Manager, from his 1994 book, Beating the Street

What a remarkable lift the stock and commodities markets have had since the big announcement from the Federal Reserve last Thursday. Late Tuesday night, the Bank of Japan followed the European Central Bank and the Federal Reserve in announcing an asset buying program intended to motivate spending and stimulate globally weak economies.

This is all very bullish for the stock market, especially for sectors like technology, the major industrials, and precious metals. Hopefully, you've personally experienced some nice profits from the recent investment rally!

My point and my bottom line: If you own stocks or other investments that have rallied high in the past two months, it's time to consider putting some "tight" stop-loss, stop-limit or especially trailing stop-loss triggers in place. This way, you can decide now when you want to exit and how much of your gains you want to protect.

Below is a 12-month chart that illustrates the price movement and the 200-day Moving Average of the NASDAQ 100 index:

Chart forNASDAQ-100 (^NDX)

Bullish sentiment among newsletter writers, analysts and investors picked up dramatically beginning in August 2012 in anticipation of the current worldwide QE3 that continues to amaze and encourage. NASDAQ 100 stocks, especially popular ones like Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG),Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), Gilead Sciences (NASDAQ:GILD) and Citrix Systems (NASDAQ:CTXS) have had great short-term spikes in share price.

The precious metals stocks, which are represented by such stellar performers as Franco-Nevada Corp (NYSE:FNV), Royal Gold Inc. (NASDAQ:RGLD), Silver Wheaton (SLW) and the Market Vectors Gold Miners ETF (NYSEARCA:GDX) have had a beautiful run-up from recent lows. Of the gold producers, Yamana Gold (NYSE:AUY) and IAMGOLD Corp. (NYSE:IAG) have risen 39% and over 50% from their July 2012 lows of just 2 months ago.

Below is a chart that compares the Powershares DB U.S.dollar index Bullish (NYSEARCA:UUP) with the NYSE Arca Gold Bugs Index (HUI) over the past 12 months to the present. Here's a list of its holdings, which is heavily weighted by the "Big 3," Goldcorp (NYSE:GG), Barrick (NYSE:ABX) and Newmont Mining (NYSE:NEM) -- which also fared well during the past two months.


You can clearly see there's been a lift in bullish sentiment with gold miners versus the dollar, and the NYSE ARCA Gold Bugs Index is up 30% higher from its late July 2012 level. We've seen quite a rally in other stock sectors as well.

To my point and bottom line once again: It's time to consider putting some "tight" stop-loss, stop-limit or especially trailing stop-loss triggers in place if you own these stocks or others that have rallied higher in the past two months.

Usually, I don't like to enter these as standing orders with the brokerage firm where I trade my portfolio. As I wrote in an article yesterday, "When you enter them with your brokerage firm, the market maker may see your willingness to sell at a price below the current price and conveniently match your order up with some big client who is looking to buy at that price...In other words, I don't want the market makers to see my stop-loss or trailing stop-loss orders." That's why I like to use a system that the market-makers can't see, like the new version of TradeStops.com.

The purpose of a system like TradeStops is to keep us invested in our best positions while giving us a discipline to exit ones that are not performing as we expected. Or as the TradeStops site explains, the two big errors that traders often make, "Holding onto a loser too long in the hope of it one day recovering, only throwing in the towel when the loss finally becomes intolerable," or "Making nice gains, only to get nervous during the pullback and sell for a small profit -- or even a loss -- and then watching the stock take off to new heights without you."

One of the best ways to keep those two sad missteps from happening is to use the disciplines involved with carefully setting either a trailing stop-loss strategy or a stop-limit that protects you on the downside. You can also use this system to get alerts when the stocks you want to buy have corrected down to levels where you want to begin averaging in.

We may have a chance to do more buying at lower prices. This Friday is "Triple Witch" expiration of stock options, index options as well as index futures. According to The Stock Traders Almanac, the week following Triple-Witching Week (this week) and especially the ones in the second and third quarter of the year, are "horrendous."

The good news is not only the massive, worldwide QE3 that's a done deal, but the best months for the stock market are ahead of us. One indicator I use to gauge the stock market involves the performance of the 20 stocks that makes up the Dow Jones Transportion Index (BATS:IYT).

The 12-month chart below highlights the Dow Transportation Index as represented by the iShares D.J. Transportation Index ETF (IYT). The 200-day Moving Average (green line) helps us see the recent lows that have been followed by bold recoveries. Looks like we're about to see another one, and if the average moves above its 200-day MA, it will help confirm that the bull market in stocks is broad-based and well supported.

Chart foriShares Dow Jones Transportation Average

In the meantime, consider using a trailing stop-loss alert system like TradeStops to help you use careful disciplines that should benefit your investing results in the months ahead. We don't want to lose money, but we also want to let "our winners run."

Disclosure: I am long ABX, AUY, IAG, SLW, GDX, GG, ABX, NEM, and I may initiate some positions in the next 72 hours if the stocks mentioned correct sufficiently. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.