John Warn manages Covestor’s Precedent-Based portfolio, which combines fundamental analysis with technical indicators with the goal of minimizing risk. Once of John’s largest positions going into last week (2/20 – 2/25/11) was Netflix (NFLX), but he liquidated the position throughout the week. We took the opportunity to ask John about his reasons for selling. His response:
My reasons for selling NFLX were strictly technical. While I buy stocks based on the combined fundamental and technical picture, I almost always sell a stock for technical reasons alone. History proves that the fundamentals often look best at a stock’s top, which is why one must remain diligent.
A good example of this would be CSCO. The stock had a run for the ages from 1990 to 2000 (to the tune of 70,000% plus) and in April of 2000 the fundamentals still looked outstanding: earnings had grow 56% and 60% in the previous two quarters, while sales had grown 56% and 59%. Yet heavy selling began to knock the stock down, just as it had the general market in March. Selling on the deteriorating technical action would’ve saved one a major headache. Today, CSCO trades about 75% below the all-time high it printed in late March, 2000.
When it is all said and done, the stock market is nothing more than an auction house. Is the stock in demand or not? I had a profit in NFLX and I didn’t want it to “round-trip” on me; in other words, I didn’t want a gain to turn into a loss. With all the selling pressure that was hitting the general market this week, the decision to sell was easy. Should NFLX regain its footing and set up technically once again, I will have no problem buying it back.
NFLX chart from Google Finance:
Here’s recent performance of the Covestor Precedent-Based Model:
