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Do you have your cash ready for market pullback?

In my previous article I advocated for keeping cash in my account for potential purchases when opportunities show up.

The principle I was looking at is save cash in the account during market upward run, minimize buying, only when a stock you are interested in shows you an excellent buying opportunity such as a dip (make sure the dip is not caused by a fundamental problem, but by big investors pushing the stock down to shake off retail investors, for example) or the stock currently trading at the support level, breaking from the base etc,.

When the market starts falling, then that will be my time to start looking for stocks on sale and use accumulated cash for buying. But do not use all of your cash all at once. Split your purchases in smaller lots. I use $800 or purchase lot.

Market direction

Looking at the market, we can still see a positive trend, but currently the market is extremely overbought.

Fear & Greed

I mentioned in my previous article that I like to use Fear & Greed indicator (see above) to get a quick sense of where the market is. You can find that chart at Money CNN website. Today, the chart indicates “Extreme Greed” and the value at 90, which is the same value as one year ago. And the similar value as two years ago.

If we assume that the market moves in cycles, we may expect a repetition in future. The future may look like the one at the beginning of 2012 with a slightly prolonged period of time hanging at those elevated levels, or in the middle of 2012 with sharper correction. The fact is, the market will not stay at these levels for ever and will correct or pull back.

The pullback may look like the end of 2010, relatively shallow one, but it will be there. It will happen.

Well, let’s take a look at VIX (volatility index) which I also look at when trying to find out what’s going on with the overall market.

VIX

The VIX index is currently at 12.43 level. When was the last time you saw the index that low?

Well, I save your time and tell you. In 2006 – 2007 period before the market crash in 2008 (by that, I do not want to imply that the market will crash). Look at the oscillators. Both, the Ultimate Oscillator and MACD are in oversold territory (but MACD is not indicating reversal yet).

However, This doesn’t mean, that the market will fail tomorrow and start falling like a rock. It looks like there is still a lot of capital flowing from bonds to stocks and we still may see a long period of market going up and up and up like without the end. When you take a look at intraday charts, you can see that the investors are picking up every dip which occurs and buying stocks. That indicates there is still a lot of money.

What to do?

Do you want to chase this market? All stocks I wanted to buy were following the overall market’s trend and they are overextended.

NGLS – dramatic break thru above 200 day MA. Great sign, but extended almost 10% above 50 day MA. The stock may correct this extended run back to 50 day and continue back up. Indicators are in overbought territory and slowing down.

PSEC – steady uptrend without a rest. Indicators slowing down dramatically, MACD showing a crossover and moving into negative territory. Ultimate Oscillator is already negative (but still close to overbought and heading down). Stock extended 6% above 50 day MA.

FGP – a parabolic run up, hitting upper Bollinger Band, reaching November 2012 major pivot point (top) or resistance, we may expect the stock to bounce off of it down before it breaks up. Ultimate Oscillator in overbought, MACD just crossed into a positive territory as well as Chaikin Money Flow indicator (which I also use). So this stock doesn’t look that bad, but signals are mixed to make a decision.

Do you want to start shorting the market (if it is your trading philosophy)? I wouldn’t do it either, although there is a growing number of traders who are moving to the bear side of the market out there.

However, I am still saving cash, because I believe, based on what I see on the charts (and I like it, because I can see nice capital gains), that this market is due for correction. It can be a small one, just down to 1450 level (SPX) or 1430 or even 1400. And that will be a great opportunity, to add more shares to my portfolio.

Why buying now, when the prices are high, when I can be comfortably saving cash (which I have to do anyway) and as soon as the market starts correcting start picking up those sweet cherries on the top of the cake instead of buying now and when the correction begins ride it and sitting on losing stocks for who knows how long. And honestly, I hate seeing my account with too many red numbers in it.

Happy Trading!





6 responses to “Do you have your cash ready for market pullback?”

  1. admin says:

    Marvin, you are right that the public still may push the stocks even higher as now they are panicking because of not being in. Mostly the mutual fund managers are rushing in to buy more shares to justify their (mediocre) performance.

  2. admin says:

    Dan, I agree with you. There are great stocks out there which may provide a great opportunity even during the market being so overbought. That’s I wrote: “minimize buying, only when a stock you are interested in shows you an excellent buying opportunity” meaning that if an opportunity shows up, I would buy. As of this writing I am interested in adding NGLS into my portfolio and it seems like today the opportunity to do so is going to present itself even though the market is still horribly overbought.
    Thanks for stopping buy.

  3. […] Do You Have Your Cash Ready for a Market Pullback? – Over at Hello Suckers, Marvin writes about building up his cash levels because he believes the market is overextended and ready for a pullback soon.  When the pullback happens he will take advantage.  I wrote about this earlier this month, whether to build up cash or invest immediately, and I still believe you can find individual dividend growth stocks at good current valuations worth buying. […]

  4. Dan Mac says:

    While the markets may be a bit high right now I still believe you can go out and find individual stocks that are trading a pretty decent valuations. However there are definately some stocks that are overextended as well in my opinion and I look forward to any pullback that would allow me to get some great companies at great prices!

  5. I agree that they are overextended. Unfortunately when stock prices rise the general publics tends to assume there is less risk, when you and I know they are actually taking on more risk.

    Great write up. I always have cash on hand in case of a black swan event, I am still kicking myself in the butt for not investing in BP after the oil spill.

  6. admin says:

    Brett, I agree and I am not saying we are heading to a crash. Just nice small or even bigger correction, pullback, resting time would be nice and creates a great opportunity to buy more shares. Nothing grows forever as well as nothing falls forever, unless you go bankrupt. Although in today’s market I wouldn’t be surprised by wild runs up without rest and wild falls. People out there are crazy.

  7. Brett @ wstreetstocks says:

    The markets are definitely over extended. The S&P will still reach 1,500 in the near future, but a pullback should occur soon after. The VIX is simply too low.

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