By Michael Cintolo, Vice President of Investments, Editor of Cabot Market Letter and Cabot Top Ten Report
From Cabot Market Letter 1/30/08

Jesse Livermore once said something to the effect that Wall Street never changes—the stocks change, the investors change, but Wall Street itself never changes, because human nature never changes. And part of human nature is to resist doing what's uncomfortable; people usually look for explanations and reasons to justify doing what feels good.

In investing terms, what feels good to most investors is holding on to a big winner. (Or maybe we should say instead that what feels bad is selling a big winner…two sides of the same coin.) Usually the company behind the stock is popular, makes great products and has a dazzling story. Because of this, investors hesitate to bail out, rationalizing a stock's weakness with a variety of explanations, all of which will pass in time…or so they think.

With this in mind, it hasn't been a surprise to hear that many investors are still holding on to Research in Motion (RIMM), Apple (AAPL) and Baidu (BIDU), despite their poor action. We think that's a big mistake! Remember that no matter how great a stock has been or how great the company, every stock eventually tops out. And with our trend-following indicators decisively in the bearish camp, the odds favor these stocks having already hit their zenith.

Another nugget to remember is this: The worst-performing stocks in bear phases are often the ones that rose the most during the prior up cycle. Now, we're not going to get into a prediction game of how long the market is going to slide, and how deep the drops in some of the big leaders will be. But we do know that the trend is down, and seeing how much water these big stocks have taken on, it appears their runs are over.

For instance, notice the steep slide in Baidu, which fell from 418 just before New Year's to a low of 240 last week—a stunning 43% drop in only four weeks. Apple's decline during the same period was 38%, and it's now sitting beneath its long-term 200-day moving average. Research in Motion slid 34% from its December peak to last week's lows. Even Google (GOOG), a higher-priced, less-volatile stock, fell 28% over the same span.

In our view, these are abnormal price breaks, as big investors decided to dump shares with abandon, and few stepped up to buy with any conviction. Remember, when funds want to get out, it takes them weeks or months to do so. That means it's unlikely all the selling is over.

Bottom line, if you own one of these big leaders, you should be looking to sell on rallies. (If you have a huge profit, you could consider holding a small position, as we've done with First Solar.) If by some chance these stocks buck the odds and head higher, you can always buy them back in the next bull phase. Right now, however, the risk is to the downside.

Another reason to sell those "old" winners:  Even if they do head up, you probably won't want to buy them back. Why? Because there will be new leaders in the next advance, stocks that are just getting off their launching pads.

That's why we're spending time now searching for the next Apple, the next Research in Motion, and the next Google, confident that the next upmove will be well worth the wait.

Click here for information on Cabot Market Letter.

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