Last week was one of the wildest week’s I can recall in my history of trading. One day we were up large and the next day we were being punished by the bears. Holding overnight has increased the blood pressure of many if you were heavily invested. Last week’s trade of the week was to hold high levels of cash and systematically deploy. In retrospect, that should have been able to keep you from racking up significant losses during such a shaky week. If you can prevent losses in a bear market and make profits in a bull market, you’ll have a very happy career in this industry.

I am more concerned with preventing losses than making profits here whereas the average retail investor is always scared of missing an opportunity, so they usually rush to invest thinking a stock is cheap. Unfortunately, bear markets make cheap stocks even cheaper and that means lots of red in your portfolio if you invested too quickly. I’d rather be late to the bull market than stuck invested in a bear market with little cash on hand.

Charts are beaten badly right now, but this is when opportunities are created. Unfortunately, this market is so wild lately that it is very complex to know what is next. Without QE3 announced, I find it hard to think we are just going to go up and up from here. I see more of a range being developed and gun to my head, I’m believing we may be near the top of that range rather than the bottom.  If you are going to make swing trades, I’d consider sticking mostly to larger-caps as more bulls will be in support of them over a small-cap which has weaker financials.

Europe is still dominating the headlines. This concerns me because I do not believe this will be over anytime soon. Even with short-term positive headlines, the crisis is not over. For every positive headline we have, it seems we have a few negative ones lined up. This is more reason I want to stay in high levels of cash. Another reason is this ensures we are not in a solid stock picking environment. Instead of trading specific stocks right now, we are moving up and down as a whole. This is why I’m sticking with mostly indexes.  If you’re trading stocks to the long-side, look for stocks making higher highs and higher lows during this downtrend.

I still have my two long-term positions in Gastar Exploration (GST) and Dejour Energy (DEJ). DEJ just reported solid earnings on Friday and the stock rose significantly off the lows. I did not aggressively add due to the fact that this market can wear down even good earnings reports. To hedge my longs, I have a modest position in ProShares UltraShort Russell2000 (TWM) which is a leveraged inverse ETF (200%) for the Russell Index. I am mostly trading around core positions for these three as it provides me exposure to profit on up and down days. Gold has received a margin increase and I initiated a modest short position by going long PowerShares DB Gold Short ETN (DGZ). If a gold selloff picks up, I will look to aggressively add there as well.

Those are the opportunities I am currently taking advantage of with plenty of room to add if one starts to look more favorable. Another opportunity I am watching is Tuesday mornings economic data. Tuesday morning has a list of economic data in the premarket and frankly, I have little optimism for any of them. If the bulls can work higher on Monday, I will consider adding to my shorts by going long TWM. This could burn me overnight, but due to the fact I have very high levels of cash and little risk on the table, I can take more risks like this. On a strong close Monday, I’ll look to add to TWM with the intent of a Tuesday morning sell-off. If Monday is weak, Tuesday may already be priced in therefore the trade may not be relevant. Also, a positive headline from Europe could trump the morning economic data, but positive headlines have been rare lately.

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With high levels of cash, be ready to deploy some this week, but don’t be too quick to deploy it all. It is very unlikely the damage is over with. Markets always run higher than anyone thought possible and always fall lower than anyone thought possible. I expect that trend to continue.

As always, do your own homework to see if you agree. Good luck out there.

Mike

At the time of publication, Kudrna was long GST, DEJ, TWM, and DGZ but positions may change at any time.