Study of Signals

[j.c.]

Hold On To Stocks If They Get Quick 20% Gain
Paul Whitfield Tue Feb 21, 7:00 PM ET

When a stock breaks out and races to a 20% gain within three weeks, an investor faces a choice.

Do you sell for a quick gain or sit tight for bigger gains?

IBD studies suggest that such fast movers should be held at least eight weeks. A stock that surges 20% out of the gate is showing tremendous strength.

Sometimes, though, context matters. Back in 1999, in the midst of the dot-com mania, a quick 20% gain didn't mean as much. On Oct. 14, 1999, IBD ran an article calling the quick 20% gain "a more fallible signal than in the past." Stocks were rising without any history of profits.

The investing climate is more rational today. The quick 20% gain is once again a reliable, sit-tight signal.

To give you an idea of the difference that rule makes, take a snapshot look at 2005. How many stocks on the IBD 100 list at the start of '05 shot out of a base with a quick 20% gain some time during the year? How did those stocks fare?

Among the IBD 100 stocks in the Jan. 3, 2005, issue, seven became quick 20% gainers after breakouts in '05. Only two were below that 20% gain at the eight-week mark. All went on to big gains.

Here's the score card:

Chicago Mercantile Exchange (NYSE:CME - News) broke out in June. It was up 21% in three weeks, up 38% in eight weeks and up 82% at its November high. There were corrections of 16% and 18% en route to the high.

Google (NasdaqNM:GOOG - News) broke out in October. It was up 20% in two weeks, up 31% in eight weeks and up 48% in January. It had single-digit corrections en route to its peak.

Marvell Technology (NasdaqNM:MRVL - News) broke out in November. It was up 22% in about two weeks; up 17% in eight weeks; and up 52% in January. It had single-digit corrections before reaching the summit.

Hansen Natural (NasdaqSC:HANS - News) had a breakaway gap in November. In two weeks, it was up 20% from the highest point in the gap, up 41% in eight weeks and up 80% in January. It had a 14% correction en route to its high.

Atlas America (NasdaqNM:ATLS - News) broke out in November. It was up 21% in two weeks and up 44% in eight weeks. It recently corrected about 12%.

Building Materials (NasdaqNM:BMHC - News) broke out in February 2005. It was up 20% in three weeks, up 19% in eight weeks and up 151% by October. It had several corrections of 8% to 22% en route to its apex.

Oil refiner and gas station operator Valero Energy (NYSE:VLO - News) broke out of a base-on-base Jan. 14, 2005. It then gapped up after the Martin Luther King Jr. holiday weekend on 72% higher volume (point 1).

The stock rose 23% in two weeks (point 2). In eight weeks, it was up 38%. A month later, it began a 29.5% correction (point 3). The stock then took off again and was up 145% by September (point 4). It hit a new high in early February before correcting again.

http://news.yahoo.com/s/ibd/20060222/bs_ibd_ibd/2006221corner;_ylt=ApVAlPDmdD48KUZtcl_4vBCffbcF;_ylu...