Time to Play Some Defense?

Today was the kind of day that really tests my fortitude investing. It highlights my lack of knowledge and experience and leaves me scratching my head what to do.

I don't worry too much about bad news - I try to stay focused on the price and volume action of the market. However, today some of the old stories popped up again: inflation and recession. To some degree the market appeared to have moved past these - or maybe gotten used to them is a better way to put it - but a surprise increase in core inflation sent the market tumbling today.

The NYSE, Dow, and S&P 500 each logged a distribution day; that's now five for the S&P 500 in the past four weeks - a real danger sign. However, the Nasdaq - which has been leading the charge - again avoided a distribution day (today's volume was lower than yesterday's) and still remains at just one. Both the Nasdaq and the S&P 500 remain above their 50 dma, the Nasdaq by 8% and the S&P 500 by 3%.

Even with the progress this rally has made, I still can't see much leadership outside of Energy, Agriculture, and Commodities. This is obviously a catch-22 - if the market's leadership is derived from inflation plays, the rally cannot last long. Somehow though it's managed to muscle ahead for some nice gains, in an orderly fashion even.

Once again I'm wondering what to do. It would be easy to sell everything and take my profits. It wouldn't be wrong, I'm up a good deal. However, when I hear about how O'Neil traded, I'm struck by how often he owned stocks for several years. I think it's possible, and maybe ideal, to find a few great growth stocks and hold them for longer periods. But would O'Neil do that in this market?

Another option is a compromise - I could take some profits to reduce my exposure and let the remainder ride. At this time I'm about 80% invested, and that might be too much. Of course I have my stops in place so I don't really have any capital at risk - but if I lose my gains that's not much better. This option is attractive to me.

I could also sell the positions that are up less and hold my big winner, (SOL). I'm up enough in (SOL) that I should be able to ride out another correction, but my other two stocks would lose their gains or could even become a loss.

My preference would be to wait until I'm more certain the uptrend is over. The problem is, if I hold until I'm sure it's time to sell, it's already too late.

I'm trying to find a balance between greed and patience. My preference is to hold on and see how far the stocks I own can go. I don't mind riding out a correction. I'd like to have some stability and not become 'panicked' into selling each time the market doesn't look great.

I'm not going to plan any new action at this time. Only the DJIA lost it's 10 dma, and the S&P 500 and Nasdaq have the 50 dma to catch them if they continue to fall. Though the market doesn't look as good today as it did last Friday, I don't think the sky is falling - yet. However I'm more skeptical now and I will continue to evaluate my defensive options. If the NYSE should log another distribution day this week I think I'll be forced to make a decision and move on it.

-Geoff