The Stock: Research in Motion Ltd.
Recent price: $69.20
Trend: The S&P Technology Index hit another 52-week high last week and continues to be a positive driver in the market's rally. But investors know that the tech space is highly competitive, especially with such big stakes and ample opportunity for failure for companies so dependent on the right mix of human capital. Even when there is considerable market share safely booked by a tech brand, competitors aggressively chip away at the dominant player.
This is the story of Microsoft Corp. and its colossal fight to maintain its position. Although it is currently pleasing investors enough to hit a 52-week high after the company's first quarter profits beat estimates and its new Windows 7 operating system hit the marketplace, the stock is now only a modest 8 per cent above the five year average price of the stock - not the kind of return that makes for especially happy long-term shareholders.
This is the challenge for big cap tech stocks: keeping investors excited about growth potential and not disappointing them. Trend analysis helps reveal when investors should abandon the company's growth storyline for the market's bad review.
The Trade: Research in Motion Ltd. was profiled in this column at the beginning of July when its share price was showing weakness. It was presented as a stock with short-term risk, but qualified as a buy opportunity on potential price support. The Stock Trends Weak Bullish indicator, triggered when a bullish stock's price has moved below the 13-week moving average trend line, alerts investors to monitor their holdings for a possible long-term change in trend. Sometimes it is a signal to buy on price weakness, a call on RIM that seemed worthy in July.
Almost four months later that optimism now appears misplaced. Investors should take the stock's recent pullback as call to exit.
Selling a stock - especially a major tech stock like RIM - demands that investors command prudent trading practice to rule over their emotions. The feel-good story promoted by RIM bulls must give way to the disappointed market audience. The stock price failed to match or eclipse its peak of $95 during the spring breakout, dropping from $94 to the $75 level a month ago. The stock slipped to $70 at the beginning of October, and would have triggered a sell at that time, as the July Stock Trends profile of RIM advised. The July trade was a failure, but longer-term shareholders should also consider heading for the exit.
The Upside: Selling a stock has practical implications beyond removing the risk of further losses in a particular trade. Freeing up capital to employ in alternative trades with better risk profiles may enhance portfolio returns. There are other tech stocks exhibiting more convincing bullish trends.
The Downside: The identity of Research in Motion as a growth stock is never certain. Will it stagnate as it did in 2005? Or will it reassert itself as it did in late 2006? RIM's move below the 40-week moving average trend line suggests the former is more likely, but if it is the latter shareholders who sell now can always show their love and buy into the RIM growth story again.
Skot Kortje has been analyzing stock market trends for 15-years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to Stocktrends.ca