Tech stocks such as Nvidia, Arm Holdings and Super Micro Computer have led the stock market. What if you own those stocks? Should you hold for potentially more gains, or sell and take what are likely big profits?
There's no use chasing these stocks at this point. Euphoria has taken over. Although these investor favorites haven't flashed traditional sell signals, the stocks are well above 25% profit taking zones of buy points.
Investors who own shares can hold if they have a long-term perspective, but beware that a drop could be severe and wipe out much of your profits.
Or, investors can sell at least a portion of their positions to lock in profits. There's nothing worse than racking up a nice gain only to see it evaporate quickly in a downturn.
With any fast gainers, be on the lookout for a climax top.
A climax top generally occurs when a stock has a fast, extreme run-up in price coming out of a breakout from a first or second-stage base, usually after about 18 weeks. In a climax run, stocks climb between 25% to 50% in two to three weeks and show wide daily spreads from low to high.
If a stock is 70% or 100% beyond the 200-day moving average, it could be another sign of a climax top. When you see a climax top, its time to ring the register if you haven't already.
Another strategy includes using options, such as buying protective puts on the stock to help preserve profits in case the stock tanks. Premiums could be high for these puts, but they act as insurance.
Nvidia Stock Hits Another High
IBD 50 stock Nvidia hit an all-time high Monday. Shares are 43% extended from a flat base buy point of 505.48. The stock broke out Jan. 8 and hasn't looked back. This straight-up action essentially locks out new investors, because there is no proper buy point to get in.
Nvidia stock flashed a bullish "power from pivot flag" on its chart, as it climbed 24% from its buy point in 15 days. Put that among reasons to hold. Investors still believe in the stock, as shown by its 2.1 up/down volume ratio.
The Magnificent Seven stock is around 32% above its 50-day moving average and around 59% above its 200-day moving average.
Nvidia is expected to report its fourth-quarter earnings Feb. 21. It's best to have a plan ahead of the release in case the stock sells off. This is where taking a portion of your gains or using protective puts are smart strategies.
Nvidia is too early into its run to fit climax-top characteristics.
Arm Stock Explodes After Earnings
Arm stock is extended from its buy point of 69. The IBD 50 stock gapped up nearly 48% in enormous volume on Thursday, following the chip design firm's beat on its fiscal third-quarter earnings and revenue estimates late Wednesday.
The stock jumped another 29% Monday in heavy trading. Investors may want to trim and take some profits on their windfall. Arm shares may be surging on a short squeeze.
Even after pulling back from the day's highs, Arm stock closed 102% above its 50-day moving average Monday, according to MarketSmith chart analysis. This extreme pace is not sustainable. (Because it went public on Sept. 1, there's no 200-day moving average yet.)
Supermicro Near A Top?
Super Micro Computer emerged from a late-stage base, which makes its fast advance more of a risk.
Shares jumped nearly 36% on Jan. 19, and bypassed a buy point of 357 after the company raised its sales and earnings guidance considerably for its December-ended quarter. The stock got another lift after the actual fiscal second-quarter profit and sales numbers came out on Jan. 29. Supermicro also flashed a Power From Pivot flag with its 55% gain from the buy point.
The stock is about 170% above its 200-day line.
Follow Kimberley Koenig for more stock market news on X/Twitter @IBD_KKoenig.
