When should an income investor consider taking profits in a
The question is flawed in one respect. It implies that sell
strategies differ for the income investor. But the market doesn't
change the way it behaves simply because the investor is fixated
on a dividend.
Sell rules are sell rules regardless of why the stock was
In the May 4 issue of IBD,Walt Disney (
) was discussed.
The article pointed out that Disney had shaped a 14-month long
base. The handle offered a potential buy point at 44.60.
IBD also noted that a long base can be a positive. Price
losses can drive weak holders out of a stock, but so can time.
The fewer the weak holders, the better. Breakouts are less likely
to be harmed by nervous selling when weak holders are few.
Disney broke out on May 9, clearing the buy point in volume
that was 149% above average.
Over the next eight sessions, the stock corrected as much as
2.4% below the ideal buy point in declining volume. With that
weak selling out of the way, Disney advanced.
The climb was steady with the stock holding above its 50-day
In recent sessions, the stock was as much as 19.7% above the
44.60 entry. A pullback Tuesday and Wednesday trimmed the gain to
The 20%-to-25% profit level is an area where many IBD-style
investors will sell. That's because a stock will often begin to
consolidate after notching a 20% to 25% gain from a breakout.
So, investors who bought Disney on the May breakout could
consider taking profits.
The fundamentals discussed on May 4 haven't deteriorated for
Disney. In fact, they've improved. In May, the Street expected
earnings to rise 16% in fiscal 2012 ending in September. Now
analysts have upped expectations to 21%.
Shouldn't that affect the sell strategy? No. Selling is almost
always dictated by chart action.
What about waiting for the dividend payout before selling?
Normally, that's not a good idea because normal price action
can erase enough to equal a quarterly payment. In Disney's case,
it's an especially bad idea because the dividend is paid once a