Benjamin Volk Quantitative Investment Analyst meetinvest

By Dr. Benjamin Volk, Quantitative Investment Analyst at meetinvest:

While I was catching up with a good friend of mine (who lately discovered meetinvest) over a cup of coffee last weekend, he asked me the following question, which I felt might be of general interest:

“What should I do if a stock is no longer on my stock list on meetinvest? As far as I understand, the stock list shows me all the stocks that have passed the “filter” and can be bought. But what happens if I bought for example Apple (AAPL US) two weeks ago, and now it is no longer on the list? Does that mean that I have to sell it immediately?”

In order to tackle this question, we have to firstly consider the reasons that can cause a stock to drop from a list.

It might be a bit surprising, but sometimes the reason for a stock dropping from a stock list is simply, that it doesn’t make the cut for the top 200 stocks any longer. For instance in Joel Greenblatt’s screens, a stock, which was previously ranked 195, could now be ranked 201 and will thus drop out of the list. Another common reason is that a slight increase in price is sometimes enough to push a criterion like the P/E ratio, into not qualifying the stock any longer.

Either way, not being on the list anymore does not mean per se that these stocks are now fundamentally bad whatsoever, it just means that they do not make the cut at a specific point in time. Therefore, just because a stock is no longer on one of your stock lists, does not necessarily mean that you should sell it immediately.

“But how do I now determine when and whether to sell a stock, which is no longer on the list?”

When it comes to buying a stock, the answer is clear: If a stock passes through one of your stock lists, it means that the stock is “fundamentally good”, and should therefore be considered as a potentially interesting “buy-option”.

When it comes to selling a stock however, the answer is less clear, as the various experts featured here on meetinvest handle “exit points” differently, and do not generally employ strict exit rules. What we would then suggest, is the following:

Should a stock be no longer on your preferred stock list, observe if the stock is still making “higher highs and higher lows” (as explained in our section “A model for selling”. If so, there is no need to sell the stock just because it is no longer on the list. If the stock still has upward momentum, let it run, and protect your position by setting “stop-losses”.

To illustrate this point, imagine riding your bike and stopping to pedal. You bike will not instantaneously stop but continue to move forward for a certain period of time. A similar phenomenon occurs for stocks: if a stock is in an upward trend, let it run and do not immediately jump off.

In the case that momentum is lost and the stocks show signs of reversing (as for instance explained in “Protecting Profits“), it might be a good idea to sell the stock and replace it with another stock on the list.

To sum things up: Don’t worry too much if a stock drops out of the stock list.

Although this means that there are “potentially better “ entry positions, it does not mean that you should sell it immediately. Check whether the stock is still making higher highs and higher lows and protect your position with adequate “stop-loss” orders.

If there is no momentum left in the stock you might want to consider getting out of the position and replacing it. Always consider setting “stop-losses” to protect your positions and reduce the risk of substantial losses.

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