Now before you start saying: “But Joe, you recently put out a blog post talking about why you continue to sit out,” keep one thing in mind…MY OPINION OF THE MARKET CHANGES FREQUENTLY. Why? Because the market is extremely dynamic and can change its character very quickly. You have to be open-minded and flexible. Being stubborn and sticking to an opinion gets you nowhere, especially when the market is proving you wrong. That is why I run screens and go through approximately 1,000 stocks every night. It’s the only true way I know how to evaluate the market’s overall health. When I find an abundance of setups, I feel more positive about the market. When the ideas dry up, I become more defensive.

Last week, I started to find a few decent setups. The end result: I took profits on some stocks ($V $MA $CMG $HANS) and got stopped out of a few others ($BIDU $ACTG $WYNN). I took quick profits because I don’t trust the market yet, and I took small losses because my number one rule is to protect my portfolio. The bottom line: I made very little progress, further telling me the market is not ready to start a SUSTAINABLE uptrend yet.

I realize that many big caps are holding up well ($AAPL $AMZN $GMCR $PCLN), however, as we start to bottom, I would prefer to see leadership broaden out. Currently, it seems very narrow to me. In other words, everyone’s watching the same 5-10 stocks! Historically, that does not bode well for the market.

Wednesday morning (9/21/11), I returned to a 100% cash position when my trading instincts told me to be defensive. As a result, I dodged the subsequent decline on Wednesday afternoon. Going forward, I feel the market needs more time to correct before we will see a sustainable advance. My advice is to remain cautious and keep positions light if you trade. An even better suggestion is to simply sit out, as traders tend to get “chopped up” during these volatile times.

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1) Stocks are acting very strong technically. Over the past 3-4 weeks, I have suggested to slowly scale into this market. The majority of stocks that I recommended have worked out well and they are now either barely correcting or they are pulling back orderly on light volume. Examples include $GMCR $ISRG $NETL $LULU $IPXL $NFLX $CLNE $ATHR $CAGC $BCSI.

2) The major indexes continue to climb on strong volume and consolidate on light volume, a positive sign in my view.

3) The big institutions continue to put money to work. If you are a large mutual fund or hedge fund, your universe of growth stocks is limited. In other words, you have to buy Big Cap stocks with liquidity. Even if you do not trade these names, it is worth observing them to see what the big boys are doing. The price action in $AAPL $ISRG $GOOG $BIDU $AMZN $PCLN $V $GS is very constructive. The majority of these stocks are breaking out or building new bases to possibly break out over the next 4-8 weeks.

4) The stocks that continue to show up on my fundamental and technical screens cover a wide range of sectors showing me that this recent rally is broad based. Examples include: Tech, Retail, Energy, Semis, Restaurants, etc.

5) Everyone seems to fall into one of two categories. They either hate this rally or they are a cautious bull. I would consider myself the latter. My point is that VERY FEW people are in the crazy bull camp and feel this market has any legs left in it. Keep in mind: “The markets tend to fool the majority.”

A word of caution: I realize the markets have had a nice run over the past few weeks. I am not saying to jump in right now if you are not invested because we could see a pullback. If you did get in recently, hopefully you have decent entry points on your stocks and you have “room” to let your winners ride. If you did not get in, don’t chase extended stocks but rather look to buy them on pullbacks to logical support areas. Overall, I remain positive on this market because of the strong signs listed above.

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1) The light positions that I took over the past week have worked out well so far: $NETL $CAGC $ISRG $GMCR $NFLX.

2) I took some profits on $NETL into strength on Tuesday and it pulled back on light volume Wednesday. It’s always a good sign when stocks breakout on strong volume and pullback orderly on lighter volume.

3) The NASDAQ Composite rose on higher volume on Friday 2/12 and Wednesday 2/17. They were not big up days, but still a subtle sign of accumulation.

4) Steady put buying shows me that sentiment remains negative. I always pay attention to investor psychology because “the market tends to fool the majority.”

5) Many stocks are trying to build the right side of their bases. I’m not recommending to buy them now but to keep them on your watch list if they “setup” and offer decent low-risk entry points. Examples include: $V $AAPL $ATHR $CLW $FIRE $ARST $IMAX $INFY $CLNE.

6) My stronger ideas that could breakout soon include: $IPXL $EVVV $HGSI $GMCR $MNRO.

I still suggest to remain patient as the market needs time to carve out proper bases. I wouldn’t be surprised to see a “choppy” environment over the near-term for two reasons. First, the NASDAQ may run into some resistance now that it has rallied back to its 50-day moving average. Second, part of base building involves volatility and shakeouts. That’s why I would rather wait for more stocks to continue to build their bases and buy them at the proper “low-risk entry point” rather than buy them now and possibly get shaken out. My best advice is to continue to keep positions light, cut losses on your weaker performing stocks, and wait for more signs of health before increasing your investment levels.

Please keep in mind that the purpose of this blog is to help people with idea generation. If you trade some of these stocks, PLEASE, PLEASE, PLEASE use stops. In other words, if some of these stocks turn against you and the market doesn’t cooperate…protect your portfolio! Thank you. Good luck trading!

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