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How to Sell a Gold Stock

By Brian Hunt, Editor in Chief, Stansberry Research
Monday, April 5, 2010

The trade sounded too good to be true.
The mega-rich Chinese government, ensuring the success of a few small gold and silver stocks?
Almost everyone likes a good "China story," and almost everyone likes a good "gold mining story." Put the two together and you've got a heck of a story.
This story was all my colleague Matt Badiali, editor of the commodity-focused S&A Resource Report, could talk about for several weeks last year. He encouraged anyone who would listen to buy several mining stocks operating in China and favored by the Chinese government.
The results of Matt's research have been extraordinary. One of his top picks, Jinshan Gold Mines, is up more than 450% from his original recommendation in July...
I'm telling not telling you to gloat about my firm's stock picks, however. You see, with the stock market up 76% from its March 2009 low, and with many stocks like Jinshan up hundreds of percent, it's tempting to forget about a crucial component to winning in the stock market.
It's tempting to forget about how you'll sell a winning stock.
After all, most people can't help but get attached to a stock that has performed so well. They feel like they'd be selling off the family dog.
You can't take that approach to trading stocks. You can't treat stocks like loyal pets. You can't fall in love with a stock. No stock will ever love you back.
It's precisely when a speculative position is treating you well that you must start planning on getting rid of it. When a speculative position is up 200% or 300%, you must remember your exit plan... or even alter it.
When Matt recommended Jinshan, he placed a protective 50% stop loss on the position. Fifty percent is a wide stop loss... one typically only used on volatile mining or biotech stocks. It's a smart stop to use when you initiate a position in a speculative stock... It gives your trade plenty of "rope" to work in your favor.
But consider someone who bought $10,000 worth of Jinshan on Matt's original recommendation...
This trader's stake is now worth $55,327. He's sitting on more than $40,000 in profit. Keeping that original 50% stop loss on the position is keeping a big chunk of money at risk.
If the stock market were to decline big, a 50% stop on this position would result in a sell order triggered when the position was worth $27,663. You'd be exiting the position with "only" $17,663 in profit.
But let's say you "tightened" your stop to 15%. This means you'd sell the position if it declined just 15% from its closing high, rather than 50%. Using a 15% stop, you'd exit the position when it fell to $47,027. This preserves a profit of $37,027 on the position. As you can see, this is an extraordinary difference.
Granted, tightening your stop to 15% will increase the chances of you getting stopped out of the position. But if you feel the position is fully valued... or if you're concerned about the likelihood of a substantial general market correction, it's worth considering. It can make for a large difference in profit.
If you have some extraordinary winners that you added to your portfolio last year, take a close look at their valuations. Has the big market run made them overvalued? Could they suffer a 30%... 40%... or even 50% decline if investors got spooked about the giant debt problems most Western governments face? If the answer is yes, consider tightening your trailing stops. As we've seen, the difference can be many thousands of dollars.
Good trading,
Brian Hunt

In The Daily Crux
Market Notes
Health care giant Johnson & Johnson climbs to fresh highs... up 10% since November.
New highs for Canadian stocks... fund EWC up double digits in two months.
Big fast food gains... McDonald's and Yum Brands (KFC, Taco Bell) make new highs.
Oil breaking out... crude touches $85 for the first time since January 11.
Market Watch
Symbol Price
S&P 500 1223.12 -0.1% +10.6%
Oil 38.22 -0.2% -0.3%
Gold 139.11 +0.8% +22.3%
Silver 29.51 +3.2% +62.6%
US-Dollar 79.17 -1.3% +4.3%
Euro 1.33 -0.8% -10.4%
Volatility 18.02 +0.1% -15.2%
Gold Stocks 590.99 +1.6% +25.5%
10-Year Yield 2.94 -2.7% -15.5%

World ETFs
Symbol Price
USA 122.76 -0.1% +10.6%
Canada 30.56 +0.2% +18.0%
Russia 21.98 +0.2% +17.2%
India 37.92 +0.2% +19.4%
Israel 16.76 +0.4% +10.4%
Japan 10.69 +0.5% +7.0%
Singapore 13.71 -0.2% +18.1%
Taiwan 14.92 +1.0% +20.2%
S. Korea 57.19 -0.2% +21.5%
S. Africa 72.26 +0.5% +29.7%
China 43.84 -1.3% -3.3%
Lat.America 53.21 +0.1% +9.2%

Sector ETFs
Symbol Price
Oil Service 137.74 +0.1% +20.2%
Big Pharma 63.99 -0.2% -3.2%
Internet 72.58 +0.7% +25.0%
Semis 16.18 -0.3% +26.4%
Utilities 31.19 -0.3% +1.8%
Defense 18.47 -0.3% +8.9%
Nanotech 10.08 +0.5% +1.3%
Alt. Energy 10.24 +1.6% -2.0%
Water 18.62 +0.7% +13.8%
Insurance 16.08 -0.4% +19.0%
Biotech 20.56 +0.1% +26.6%
Retail 19.59 -0.6% +26.6%
Software 24.65 -0.6% +22.7%
Big Tech 53.85 0.0% +22.1%
Construction 13.20 +0.8% +14.8%
Media 13.73 +0.7% +24.7%
Consumer Svcs 67.38 0.0% +23.4%
Financials 55.01 -0.1% +5.7%
Health Care 63.90 -0.6% +1.2%
Industrials 63.51 -0.1% +19.3%
Basic Mat 74.64 +0.4% +27.8%
Real Estate 55.35 +0.1% +21.8%
Transportation 91.39 -0.4% +23.9%
Telecom 22.65 +0.3% +16.8%

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