The eight week hold rule was first developed at Investor’s Business Daily (IBD). As William O’Neil explains in his landmark book “How to Make Money in Stocks,” initial profit-taking on CANSLIM-style stocks should begin in the 23-25% range.
However, there is one exception:
If the stock happens to gain upwards of 20% in just 1 – 3 weeks of a proper breakout, then it must be held for eight weeks.
Stocks that move with this sort of “power” often become the markets biggest winners, rising 100%, 200% or more. The reason is because stocks can only move this way when institutional demand for the stock so great – conviction levels are running so high – that the stock is unlikely to succumb to near-term selling pressure.
For example, in October 2013, Trinity Industries, Inc. (TRN) broke out of a 3-weeks tight pattern at $14.84. In the 4th week, it reached 25% profit, triggering the 8-week hold rule.
Interestingly, in week 5 there was a sell-off that likely scared many investors out. This can often happen during an 8-week period. But oftentimes, you can sit through this and the stock will rise to much higher gains.
When the stock pulls back, it’s important to re-evaluate fundamental criteria related to the stock. At the time of pullback, TRN continued to show huge earnings and sales growth (>25% from previous quarter), had rising ownership among top funds, and excellent return on equity (ROE >17%). It made sense to continue holding.
By October of 2014, just one year late, TRN had risen more than 110%, and ultimately, you would have been taken out for a profit at about $30 for roughly 100% when TRN finally violated several major moving support levels.
In addition, there are some important criteria that must also be in place for you to adequately apply the 8-week hold rule:
- Stock should be breaking out of a 1st or 2nd stage base
- Later stage bases are more risky
- Strong market-leading fundamentals
- Top-rated stock within its group
- The group itself should be performing well relative to other groups
- Excellent earnings, sales and ROE (as mentioned above)
- Good institutional sponsorship
- Owned by top-performing funds
- Rise in number of funds owning shares
They say “the real money is made in holding.” But, the best money is made if you can identify when you are in an 8-week hold situation. The holding you do thereafter may result in the best profit runs (in the shortest time) your account has ever seen.