Knowing which stocks to sell is just as important as knowing which stocks to buy. And many popular stocks scooped up during the latest bull market could be the first to tank if any turbulence hits.
Indexes are just off their all-time highs, but uncertainty is still very high.
The CBOE Volatility Index still hovers around 30, which means even some very popular stocks could sink if the market takes a dive.
It’s not that these are bad companies, or that there is something wrong with the business.
Today, we cover a few stocks to sell, in case we see a big dip.
When markets crash, very few stocks trade above their 200-day moving average.
In 2009, only 5% of stocks traded above the 200-day MA when the market fell apart.
In March of this year, we saw the same thing happen.
If we get a crash because of election difficulties, the continued spread of COVID-19, or any other economic or geopolitical event, most stocks will trade below their 200-day moving average.
Stocks trading more than two times their 200-day moving average are vulnerable to massive declines of 50% or more if we have a market crash.
Stocks that have made that type of powerful move up are generally the more popular stocks of the day.
It is hard to sell those when everyone loves them. History tells us it is usually the right thing to do, especially when volatility is rising.
Here are a few stocks to sell now…
Sell This Top Lockdown Stock
Take a look at shares of Peleton Interactive Inc. (NASDAQ: PTON). Peloton has been a lockdown and shut-in coronavirus superstar stock. People that are staying inside have ordered these interactive, connected exercise bikes to stay in shape.
Sales have spiked, and the stock has flown higher this year. In the last six months, the stock has soared by more than 300%.
When we see prices crash, that’s going to reverse direction quickly. The 200-day moving average of this stock is just 53. The stock has to fall by more than 60% to reach that level.
It doesn’t help that the shares are trading at levels that look a bit like 1999 Internet stocks. Pelton trades at more than 21 times sales and more than 300 times what the analysts hope Peloton earns in 2021.
It is an excellent company with great products. However, valuations are high, and the price is extended to unusually high levels.
If you are worried about a crash, it’s probably time to sell this stock.
An Energy Play for Another Day
SolarEdge Technologies Inc. (NASDAQ: SEDG) is another stock that has exploded higher this year. The stock has gained more than 200% this year as solar stocks have exploded higher. There can be no question that solar is the power of the future, and SolarEdge has a strong position in the solar inverter market.
SolarEdge is a fantastic company.
That is more than reflected in its stock price. The stock is trading at almost 10 times sales and more than 90 times earnings. The multiple on what analysts hope SolarEdge will earn next year is over 60.
More importantly, the stock is trading at more than two times its 200-day moving average.
Even good companies collapse in a crash. And if SolarEdge responds as more than 90% of stocks do in a crash, it will fall below its 200-day moving average.
That means enormous losses for current shareholders.
Sell This Stock ASAP
Bed Bath & Beyond Inc. (NASDAQ: BBBY) has been one of the best stories of 2020. It is one of the few retailers that have been able to execute a turnaround. Management has been able to increase its digital presence dramatically, and this has been reflected in earnings.
It has also been reflected in investors’ appetite for the stock. Bed Bath and Beyond shares have soared by more than 400% in the last six months.
It is selling assets to raise cash, and it’s in a better financial position than most retailers right now.
However, the stock is more than twice its 200-day moving average.
It is also above most analyst target prices.
When we get a market crash, it will be a long way from the current share price around $25 to a 200-day moving average that will be declining from the current $10.75 level.
When markets crash, most stocks will go back to the 200-day moving average and below it at some point.
The most extended stocks are the stocks that everyone loves and wants to own.
They are precisely the stocks you need to avoid if you are afraid a crash is coming anytime soon.
— Garrett Baldwin
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Source: Money Morning