5 Common Sell Signals in the US Market
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If you've already figured out when the right time to buy a stock is—awesome! Next up is figuring out the right time to sell.
Depending on your investing strategy, sell signals can help you determine when to exit your position if you don't plan to stay invested long-term. These five sell signals are commonly used in the US market, and you don't need to be an expert to use them.
1. A high relative strength index is a key sell signal for investors
A stock's RSI (relative strength index) charts the speed and size of price changes. In chart form, RSI showcases an investment's trading trajectory, with ascending triangles and descending triangles to represent whether a stock is overbought or oversold, respectively.
Get your hands on a stock's RSI (from a technical analyst) to determine its standing. An RSI above 80 means a stock is likely overbought, which indicates it could be a good time to sell.
2. A high price-to-earnings ratio
A stock's price-to-earnings ratio, or P/E ratio, is a simple equation. It's the share's market value divided by earnings per share (EPS). You can find a stock's EPS after each quarterly earnings report.
The P/E ratio tells you how expensive a stock is versus its earnings. A P/E ratio that's higher than the industry average could mean the stock is expensive. That's a sell signal for many investors.
3. High short interest
Hedge funds and institutional investors can short a stock, which means betting on the stock's value to decrease. You may know this if you've ever seen the movie The Big Short.
You can find out how many people are shorting a stock by looking at its short interest ratio. If a stock has a high short interest ratio (say, 10–20 percent), that means that a lot of investors are expecting (or hoping) for it to fall. That could be a sell signal in the right circumstances.
4. Debt signaling
Debt signaling is a helpful tool when analyzing a stock. Analysts use debt signaling to predict a stock's future performance based on its current debt and how the company is planning to handle it. Of course, Evergrande Group—the Chinese property developer that owes $300 billion—is an extreme example of debt, but many companies carry slimmer weights.
Stay tuned to the company's announcements to find out what its debt decisions suggest. Taking on new debt at low interest rates could signal growth opportunities. However, restructuring, delaying payments, or even filing for Chapter 11 bankruptcy could signal a sell.
5. Another sell signal to know about: Poor sentiment
It's difficult—and often impossible—to quantify sentiment. However, bad news like executive scandals, antitrust investigations, and subpar earnings calls can be a bad sign for a stock. Investors typically move quickly on this kind of news, so stay plugged in.
You can even turn on notifications for a company's name in your search engine to ensure you're acting on the trade as soon as you need to (although this is likely only necessary for riskier investments).
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