How To Play A Reluctant Market

Includes: BAC, CAT, GE, IBM, MCD
by: Brian Nichols

It's amazing how quickly the trend in the market can change -- in a matter of hours. Yesterday, we experienced our first 200 point loss on the Dow Jones since November. And both the Nasdaq and S&P 500 posted its worse loss of the year. Before Tuesday, we had not seen any sector post a 2% loss, but by the end of the trading day approximately half of the sectors traded with a 2% loss.

After a slew of positive data, the markets are now trading slightly higher. The most significant news to investors is most likely employment, and with the private sector jobs rising 216,000 in February it's a cause for celebration. Even productivity rose above expectations at 0.9% in Q4, with wages rising much faster than expected. In addition to economic news, the juggernaut Apple (NASDAQ:AAPL) will be releasing its iPad 3 later in the day, which is sure to be a market mover. Therefore, with positive economic data, and companies such as Apple and General Electric (NYSE:GE) (which reiterated 2012 growth) trading higher what should be your next move?

On Tuesday, I wrote an article calling out my own shortcomings, including an overly optimistic outlook as a result of market conditions. After Tuesday, I now believe it's possible that we experience a level of resistance or even more profit-taking over the next month. As a result I am spending the day reorganizing my portfolio and selling several of my holdings that have increased by more than 20% in 2012. I often reorganize my portfolio and take profits, which I did in December 2011, and in an article I wrote on Tuesday I suggested it may be wise to re-evaluate your portfolio, because the market's recent trend does imply that we are near resistance.

Despite the market trading higher, there are still several economic issues that exist. We have received several reports to suggest that China's growth is slowing, along with continued turmoil in Europe. In addition, fuel prices remain high in the U.S., which affects the spending habits of consumers more so than most factors in the economy. I am not suggesting that it's a bad time to be buying into equity markets, but I am suggesting that it may be wise to review your portfolio and take profits when present.

In this market your gains can be gone in a day's time, and with so many stocks trading near resistance, why not take profits? In a previous article I looked at a few stocks trading near resistance: Caterpillar (NYSE:CAT), Bank of America (NYSE:BAC), and General Motors (NYSE:GM). Some may argue that each of these companies are still significantly undervalued, and I agree. Each of these three companies are undervalued, but have returned large gains in 2012, are near resistance, and are due for a pullback before trading higher.

One of the facts surrounding the market's rally in 2012 is that it has been driven by the larger companies, and there are still several smaller, fast-growing companies that are yet to trade with the same level of optimism. The market's been led by financials and technology stocks, along with strong performance from International Business Machines (NYSE:IBM) and Caterpillar (which are weighed the heaviest on the Dow Jones).

The Nasdaq has been led by Apple's 33% YTD gain, as its $500 billion market cap weighs heavily on the index. The fact is that markets have traded higher in 2012, but the largest gains have been led by the largest of companies. I am not saying that there aren't other stocks that have driven the market higher, but the number of stocks that are responsible for the market's large YTD rally are few and far between.

Aside from Apple, I think it's wise to re-evaluate your portfolio, and if you are holding any of these big performers, then you may want to consider taking profits. There are so many other great companies that fell by large margins during the last 6 months of 2011 that are still yet to perform or reach any level of resistance.

It all depends on your outlook for the market: If you think the market is going to pullback then you may want to buy a few safe low beta stocks that typically trade against the market. You can buy stocks such as McDonald's (NYSE:MCD) or Dollar Tree (NASDAQ:DLTR) that are fast-growing and trade in strong uptrends regardless of the market's trend.

However, if you think the market is trading higher, and that Tuesday was just a period of profit-taking, then maybe you want to load up on a few stocks that are yet to trade in a way that reflects growth. Regardless of what you decide, several of the top market movers are reaching resistance which limits upside, and it's always good to re-evaluate your portfolio after large gains. I believe that if the market trades higher in the coming months, that we will see strong gains in the stocks with little movement in 2012. Therefore, I have begun selling my best performers and preparing for what happens next.

Disclosure: I am long AAPL, CAT, DLTR.

Disclaimer: The information in this article is for informational purposes only. Consult your financial advisor before making any investment decisions.