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Buy, Hold Or Sell? How To Navigate A Stock Market Correction


In a strong stock market, IBD Leaderboard helps identify leading growth stocks to buy and watch, such as Nvidia (NVDA). But when the uptrend weakens and the indexes fall into a stock market correction, Leaderboard also helps you see how to navigate that changing environment. NVDA stock offers a perfect example.


In a stock market correction, the vast majority of growth stocks will also retreat — often much more than the major indexes. In the current turmoil, tech stocks such as Nvidia, Alphabet (GOOGL), Microsoft (MSFT), Advanced Micro Devices (AMD) and PayPal (PYPL) are all getting hit.

Among these and other Leaderboard growth stocks, Tesla (TSLA) is a rare exception as it remains above its 10-week moving average. But does that mean you should buy, sell or hold TSLA stock as Alphabet, PayPal, Microsoft and AMD sell off?

For another measure of how tech and growth stocks are faring, check the Innovator IBD 50 ETF (FFTY). Driven largely by the big tech rebound from the coronavirus crash in March 2020, the ETF rose as much as 118% through Sept. 24 of this year.

But further proving that even leading growth stocks are no match for a broad stock market correction, the IBD 50 ETF has fallen below its 10-week line. It’s now testing its second line of defense, the 200-day and 40-week moving averages.

When To Sell A Winning Stock? Spot A Big Breach Of The 200-Day Line

Hold — Or Sell To Lock In Profits, Cut Losses?

Each day, IBD puts the stock market in one of three possible stages: confirmed market uptrend, uptrend under pressure or market in correction.

As of Sept. 30, the Market Pulse in The Big Picture shows we’re in a correction. While that doesn’t necessarily mean you should sell all your holdings, it does indicate that it’s best to avoid making new purchases until the stock market trend turns upward.

While several of the tech and growth stocks, as well as others, remain on Leaderboard, that doesn’t mean it’s time to buy. But is it time to sell or to hold?

When to sell stocks is generally a much trickier question than when to buy stocks.

The IBD Long-Term Leaders list highlights stocks that have shown the power to weather stock market volatility over the years. With excellent long-term track records and solid earnings stability, elite companies like Microsoft, Google parent Alphabet, PayPal and ServiceNow (NOW) earn a spot on this list.

But it doesn’t mean these stocks are immune to down markets, or that investors should hold some or all of these stocks forever.

Using Nvidia as an example, here’s a look at how investors can evaluate stocks retaining a spot on Leaderboard while encountering selling pressure.

Handling Growth Stocks Under Pressure: NVDA Stock

As Nvidia shows, how to buy stocks and when to sell stocks is not typically a question of all in or all out. You can reduce and control risk by buying and selling gradually based on your stock and how the stock market indexes are behaving.

The Leaderboard team has reduced the simulated portfolio’s position in Nvidia after it undercut Wednesday’s low. That comes after trimming Nvidia by the same amount after it fell back under its 10-week line last Tuesday. The stock remains on Leaderboard despite a round-trip sell signal.

NVDA stock reset its base count when the chart pattern it began forming in February undercut the low in its prior base. The stock went on to form and break out of a second-stage base in August.

Whether to sell or hold (all or in part) depends on many factors, not least of which is, when did you buy it?

An investor who bought NVDA stock in April 2020 is in a very different position — and mindset — than someone who bought on the breakout in August of this year.

The investor who bought in April 2020 is still sitting on a big profit cushion. The person who bought last August has seen a decent profit disappear, with the very real threat of a big loss looming.

Protect Your Portfolio, Prepare Your Watchlist

A stock market correction is certainly a time to avoid new buys and protect your portfolio by locking in some profits and keeping any losses small.

If you haven’t already, now is a good time to review growth stocks like Nvidia, Microsoft, AMD and Alphabet that have run into selling pressure after making nice runs. What key moving averages have become ceilings of resistance, and which lines will prove to be floors of support?

Also understand that stock market corrections ultimately lead to bullish stock market uptrends. No one knows with certainty when the market will recover and rebound, but we do know what to look for — a follow-through day. While not all follow-through days work, sustained upward climbs never begin without one.

Even in a down market — in fact, especially in one — keep an eye on The Big Picture and the Stock Market Today for any signs of a market rally and a potential follow-through. That will be the most reliable indicator that the stock market trend has changed for the better.

Follow Matthew Galgani on Twitter at @IBD_MGalgani.


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