Right now, if you own shares of anything that has done really well ... I would recommend taking profits and selling into this rally. If you have substantial gains of 100% on a position, cashing out your initial investment and letting your profits ride is one of the best risk management techniques out there. then you can set a 25% trailing stop in order to capture those gains should sentiment reverse suddenly.
Or ... if your thesis for holding the stock hasn't changed, then simply let your profits ride and collect those dividends (if any).
As for now ... this market looks overheated and needs a healthy pull-back. One reason I say this is because there was a gigantic spike in sell-side volume on 09/21/2012. Depending on when these large spikes occur can give us an indication of where we may be headed next. Since the spike occurred at the top of a market, this lends some more credence to the idea that we are in for a sell-off. It doesn't mean we will experience a 2008 or 2011 style crash -- maybe something closer to tax-loss selling, or funds selling some of their winners in order to beef up their balance sheets. 13,000 would represent a 4% dip from where we are today. that is a reasonable place to start buying again. But remember, individual stocks are more volatile than the overall market, and many of them will bottom out ahead of the market, and start to rally ahead of the market as well.
It's best to buy at a level of support, and only buy what you need. Going all-in at this point might not be a good idea, as 13,000 is still a very high and lofty place for the Dow to be considering the less than stellar numbers coming out of the US right now.
It definitely feels weird to be almost 60% cash right now (I am) ... but I am stubbornly refusing to chase the market. The only positions I am holding onto are value and dividend plays that I bought when sentiment was really bad, despite improving news from the companies. I feel like those plays won't fall much further than they already have, as they are trading at around their 2008 lows of support, which at this point seems to be a pretty solid support level. In other words, I'm in them for the dividends, and for the long haul.
I am also holding onto some speculative plays in which I realized a 30%+ return or more. I'm essentially letting the profits ride and took out my initial investment (plus a little extra to cover the trading fees). As long as the companies are a) following the major trend of the market, whether up or down and b) continue to stay the course as far as my initial reasoning for purchasing them, I won't be selling.
Today the Dow is surging again, but the transports are still lagging by a large margin and are showing significant weakness. Thus, our thesis for a pull back in the overall market remains in tact. Could the Dow continue to defy the odds and keep rising? You Bet! But we don't want to get caught with our pants down here. We want to have sufficient cash to buy-in on the next dip.
Three strong possibilities exist:
1) The dow continues its march upward and the transporation index begin confirming the move, signalling a new bull market
2) the Dow continues to climb, but the transports continue to fail to confirm, which keeps the pullback thesis in tact.
3) The transports reverse course and start climbing, but the Dow also reverses course and starts falling. If this happens, and the transports hit a new intermediate high (or worse, an all time high) that isn't confirmed by the Dow --- it will be time to fortify your financial Armageddon bunkers. seriously. We aren't there yet, although January is on my radar.
Each of these scenarios also underscores the importance of sector investing, rather than simply throwing everything into a single diversified ETF or mutual fund, or into a few stocks. Investing at least 10%, but no more than 30% into any one sector of the economy (utilities, commodities, manufacturing, financials and consumer stocks) allows you the flexibility to take profits in the strong sectors and deploy the proceeds into sectors suffering from prolonged negative sentiment ahead of the economic cycle. Look for a sector that is bottoming out (you can't predict the exact bottom, but that doesn't matter) and for one that is forming a top, and simply take money out of the better performer and put it into the weaker performer. Eventually, their roles will reverse.
So depending on your situation, you may want to look at taking some profits now and re-deploying those profits into a new venture or back into an existing position that you are realizing a loss on.
