Tuesday, January 21, 2014
Today's note is going to be "uncomfortable"...
But it could lead to one of your biggest trading profits this year.
Let me explain...
Last month, we showed you the big boom in biotech...
Remember, biotech is one of the greatest "boom and bust" sectors known to man.
Since 1983, the sector has seen four triple-digit runs... and one quadruple-digit run of 1,347% in the early 1990s. The busts were equally spectacular, taking the entire sector down by as much as 70%.
After the most recent bust in 2009, the Nasdaq Biotech Index started a huge rally... The index is up 250% in five years. And it was the top-performing sector in 2013.
Despite the big run higher, we argued that there would be more gains ahead...
Since then, the double-long biotech fund (BIB) has gained more than 19%. That's a big move for just three weeks.
Now here's the "uncomfortable" part...
If you have big gains in biotech, sit tight.
Many traders, when they see profits in their accounts, get "itchy trigger fingers." They want to pocket a gain before it has the chance to vanish.
Over the long term, that's the wrong strategy. If you collect your profits early, you may cheat yourself out of a big move higher. And with biotech, that could be a very big move higher...
Right now, the companies in Datastream's Biotech Index are trading at over 40 times earnings. That's up from 20 times earnings three years ago. But at the peak in 1999-2000, the index traded up to nearly 140 times earnings.
One classic piece of trading wisdom comes from legendary trader Jesse Livermore. As detailed in the book Reminiscences of a Stock Operator, Livermore said: "It never was my thinking that made big money for me. It was always my sitting. Got that? My sitting tight!"
In other words, his biggest gains came from "sitting tight" through big bull-market moves.
So that's our recommended action to take with biotech today. If you have a large, short-term gain, you might be tempted to take it off the table. But the trend here is still moving higher. So it's better just to let a trailing stop tell you when it's time to get out. (We recommend a 15% trailing stop in DailyWealth Trader.) That will give your profits room to grow.
It might be uncomfortable to sit tight on this trade. But it's the right thing to do.
Amber Lee Mason
"We love to sell our winners too soon," Dr. David 'Doc' Eifrig writes. "It's a nearly universal impulse... but a terrible investing choice." So how do you know when your winners have had enough time to run? Doc says the strategy for knowing when to sell is "determined by why you bought in the first place." Get all the details on Doc's strategy here.
On the other hand, Steve Sjuggerud says most people don't know when to sell a falling stock. "So they're frozen into inactivity... until you hear the all-too-familiar phrase, 'Well, it's too late to sell now.'" But by creating an exit strategy, Steve says "you'll never lose another night's sleep worrying about which way your investments will go tomorrow... Because unlike most investors, you'll have a plan." Learn how to create your own exit strategy here.
Small-cap stocks keep chugging higher... the Russell 2000 Index touches a new all-time high.
Gold-miner fund GDX surges to its highest level since November.
Credit-card companies are booming... new highs for Visa and American Express.
"Bad to less bad" rally continues in secondary education... Apollo and DeVry break out to 52-week highs.