R.S. Analytics'  Instablog

The close of 2012 has given us a choppy and uncertain market to say the least. There is widespread concern that year-end selling will be amplified due the coming "fiscal cliff" tax consequences, if it appears the politicians will not get a deal done. Add the Israel-Gaza Strip turmoil and you have a plenty of news to whipsaw the market. Over the last six weeks I have converted my IRA to 70% cash and exited all investments that I am not comfortable holding long term hoping if the market does crater I can pick up some of my favorite companies at a steep discount. However, I have a hard time sitting on cash so I have been employing a short-term trading strategy that has turned out to be quite lucrative and if you pick the right stocks, pick the right buy price, are nimble enough, and employ stop losses, you can do this profitably with a tolerable level of risk. Since my IRA doesn't have any short-term tax consequences and since it is a cash only non-margin account, meaning I cannot use various option strategies, I am comfortable using this strategy anytime but particularly through the end of 2012.

The stocks I picked to employ this strategy are cash rich, mid to large cap technology stocks with higher share prices that are near the bottom of their 52 week trading range with no binary events imminent. They must also have a solid cash flow, low debt, have positive earnings per share, and have excellent growth prospects. These stocks must be stocks that, in the worst case scenario, I would be comfortable holding for the longer term.

Below are two stocks I have been successfully short-term trading over the past three-four weeks.

1) F5 Networks (FFIV)

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Business Summary From Yahoo Finance:

F5 Networks, Inc. provides application delivery networking technology that optimizes the delivery of network-based applications, and the security, performance, and availability of servers, data storage devices, and other network resources in the Americas, EMEA, Japan, and the Asia Pacific. F5 Networks, Inc. was founded in 1996 and is headquartered in Seattle, Washington.

F5 Networks has been very predictable over the last few weeks providing several nice short-term trades. I have been buying 1000 shares in the mid $85 to mid $86 range and then selling in the high $87 to $90 range. I will typically set my stop around $2 below my buy price and then watch it during the day. I have not been stopped yet and I have successfully concluded four trades with profits ranging from $1500 to $4500. I rarely hold the stock more than a day. I would have no problem holding F5 Networks for the long term if it takes an unexpected dip.

2) VMware Inc. (VMW)

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Business Summary From Yahoo Finance:

VMware, Inc. provides virtualization and virtualization-based cloud infrastructure solutions in the United States and internationally. VMware, Inc. was incorporated in 1998 and is headquartered in Palo Alto, California. VMware, Inc. operates as a subsidiary of EMC Corporation.

VMware is another stock that has been predictable over the last month - it has hit $84 per share six times and bounced nicely off of it. When I see shares of VMware close to $84 I will buy 1000 shares and set a stop loss at $82 per share. I have traded VMware three times over the past month buying at close to $84 per share and banked profits of $1750, $2400, and $4000. I did miss the bulk of a nice run up the beginning of November but I accept that as part of my strategy.

Even though I didn't get stopped out on the aforementioned trades - I understand it can happen. I am mitigating that risk by only trading stocks that fit my criteria listed above plus F5 Networks and VMware are two of my favorite tech stocks that I would not mind holding longer term. This strategy has allowed me to grow my portfolio relatively safely during times when I want cash available on short notice.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FFIV, VMW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is informational and intended to spur thought and discussion. This article is NOT a substitute for your own extensive due diligence and does NOT qualify as investment advice. DO NOT BUY OR SELL STOCKS BASED ON THIS ARTICLE. I do not short stocks nor do I invest in options.