When A Leading Stock Turns Into A Laggard, It's Time To Sell

Master This Sell Rule: Investing Tips On When To Sell Stocks When a market-leading stock starts to lag, it's usually a good time to sell. How do you know when a winner has finally run out of steam

One way to detect changes is by comparing the stock to others in its industry. Maybe its Accumulation/Distribution Rating has started to fade, indicating that institutional investors are bailing. Or maybe its RS line has begun to trail off relative to its peers.

In April 2011, Sina (SINA) was hitting a new high after more than tripling from a 46.02 of a cup-with-handle base that it had cleared seven months earlier. Baidu (BIDU), another top Chinese name in IBD's Internet-Content group, was peaking at about the same time after enjoying a similarly strong run.

At the time, Baidu boasted best-possible 99 Composite and Earnings Per Share Ratings. Sina was close behind with ratings of 99 and 95, respectively. Their fortunes soon started to diverge.

Sina and Baidu both corrected and eventually shaped double-bottom bases. But by the time the stocks were on the verge of breaking out in late July, the difference between them was clear: Baidu was still an IBD 50 stock, maintaining strong Composite and EPS ratings of 94 and 99, respectively. By contrast, Sina's ratings had dropped into the 70s, indicating that it had become a laggard.

Furthermore, Sina's base was flawed, diving 47% from peak to trough (1); it showed a handful of wild weekly swings. By contrast, Baidu's base was much less volatile, and it corrected just 27%.

Sina's relative strength line was fading even as it neared its 128.27 buy point in the week ended July 22. Little wonder, then, that the stock embarked on a 17-month slide even as the market trended higher. It hit a low of 41.14 in the week ended Dec. 14, 2012, 72% off its April 2011 high.

Baidu, however, cleared a 148.54 buy point off a that formed on its double-bottom base in the week ended July 22. Its RS line was hitting a new high at the time, confirming the . A couple of weeks later, it hit a peak of 165.96 — good for a gain of 12% (2) before it began to fade.

Keeping a close eye on your stock's technical and fundamental health can help you identify when it's going from leader to laggard, giving you a chance to act accordingly before it does serious damage to your portfolio.