Selling in May? You aren't alone. The May sell-off period in the stock market occurs before a historically low six-month bout for the S&P 500 (hence the popular investing strategy "sell in May and go away"). However, market trends aren't always the sell signal you're looking for. Instead, you should base your decision on whether or not to sell a stock on key deciding factors.
Stock metrics and company news will guide your knowledge on when to sell a stock. That isn't to say that the sentiment doesn't play a factor, but it's better to take a well-balanced approach to portfolio shuffling.
The stock's chart data might say it's time to sell a stock
Sometimes, investors will set a target price for a stock to let them know when to sell. Once you see the chart hit that high, you can confidently make the decision to sell because you got what you were looking for out of the trade. On the other hand, hitting your stop loss will make your stock sell at a prespecified loss so you don't lose too much value.
There are also other numbers to look at besides the price of the stock. For example, you can find out the RSI (relative strength index) of a stock. A high RSI above 70 might indicate that a stock is overbought, which could indicate that it's time to exit the position. To get the RSI, just calculate the average gain divided by the average loss.
Is the stock overvalued? If so, it's time to sell.
To determine if a stock is overvalued, you need to figure out its intrinsic value. If the current market value exceeds the intrinsic value, the stock is considered to be overvalued.
To find the intrinsic value of a stock, you can use:
- Discounted cash flow (DCF) analysis
- Residual income model
- Dividend discount model
The company is looking toward changes in leadership or operations
Changes in the company's executive team can be good—as Amazon expects founder and CEO Jeff Bezos's successor, Andy Jassy, to be. However, it can also signal a tumultuous ride to come, like WeWork's removal of ex-CEO Adam Neumann in 2019. Keep an eye on these shifts and prepare to sell if the changes feel desperate.
Also, announcements of bankruptcy, mergers, and other operational changes often signify a time to sell for retail investors.
Grim quarterly earnings expectations
Every public company must report their earnings once per quarter. Earnings season shines a light on thriving companies, but it also casts a shadow on companies that aren't faring so well.
Take a peek at analysts' expectations for any upcoming earnings to see if there's a light at the end of the tunnel (or if the growth will sustain). Keep in mind that companies occasionally surprise even the most tuned analysts.
You made an impulse purchase, and the future of the stock looks bleak
We've all been there. Knowing when to sell a stock often means learning to swallow your pride. Capital losses aren't fun, but on the plus side, you can use up to $3,000 in losses as a write-off for your next U.S. tax return.