Every night, I go through my stock screens and look at approximately 1,000 stocks. Why? Because this is the way I was taught to evaluate the overall health of the market. If I find tons of strong fundamental companies building sound technical bases, breaking out on strong volume, and holding their gains, I feel confident about exposing my capital to the market. If I find few quality setups, I raise cash and wait patiently for better opportunities. Here are some thoughts while reviewing my screens tonight:

1) I am finding very few quality setups. Many of the stocks I got stopped out of recently have traded lower, and most of the stocks on my watch list have failed to breakout…all these observations make me cautious for now.

2) When I tweeted these thoughts earlier, many people responded: “You’re in the wrong stocks.” I realize that a few stocks such as $AAPL $GOOG $BIDU $PCLN $LULU $AMZN $GMCR are acting well, but the leadership seems to be narrowing.

3) The narrow leadership reminds me of Sept/Oct 2007 when the market was being driven higher by 3 stocks: $AAPL $GOOG and $RIMM. I’m not saying that we are topping here, but I would prefer to see more “broad-based” participation. In addition, most of the big cap stocks mentioned above are getting “later-stage” in their moves and are extended from proper buy points. Keep in mind that I look for the best “low-risk, quality setups” that I can find.

4) The debt ceiling issue is not a factor in my stock trading. Why? Because after it’s done, the media will find something else to scare us. Remember Egypt, Greece, Libya, the earthquake in Japan, all the nuclear waste that was headed our way, Italy, Greece again, etc. That’s why I pay attention to the price action of stocks and ignore the news.

5) I always keep an open mind and realize that my analysis can be wrong. Therefore, I constantly maintain a watch list of quality stocks. If they begin to act better, I will be ready to pounce on the long side. For now, I remain in 100% cash. If I’m wrong, I’m not worried because I can always get back in.

I suggest being a little defensive and trading lighter-than-normal positions until conditions improve. Keep in mind that I trade with an EXTREMELY defensive posture and I use tighter stops than most traders. I live by the Paul Tudor Jones quote: “Play great defense, not great offense.” Although the major averages are holding up well, my trading instincts are telling me to be defensive for now.

$AAPL $AMZN $BIDU $DIA $GMCR $GOOG $IWM $LULU $PCLN $QQQ $RIMM $SPY

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