A Tough Market Gets Tougher

 | Dec 09, 2011 | 6:00 AM EST
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Earlier this week, I wrote that I had concerns about this market, but that I wasn't completely ready to throw in the towel. I was willing to give some new buys time to work.

On Thursday, a big cash position in my model portfolio got even bigger after I cut ties with some recent new buys. I didn't hold them for very long. I wanted to give them a chance to work, and they didn't. Rather than watch profits evaporate and tiny losses potentially get bigger, I sold and moved on.

When a gain in a stock fades quickly and turns to loss, there's no reason to stick around and hope the stock goes back up -- not in a market like this. Make no mistake: Growth stocks are vulnerable in this type of market. There's no real buying demand, so sellers can gain the upper hand effortlessly.

I never like taking losses, but I only have myself to blame, because I bought when the market was still in a correction. It's still in a correction, as major averages continue to sit below significant resistance levels.

It was an ugly session on Thursday. The S&P 500 led the way, falling 2.1%, the Nasdaq gave up 2%, and the Dow surrendered 1.6%. Preliminary data showed volume on the Nasdaq coming in higher than on Wednesday. Volume on the New York Stock Exchange was close to Wednesday's level.

I know full well that indices could jump 2% or more at the drop of a hat. But for now, I'll watch from the sidelines and sit the volatility out. While I'm waiting, I will continue to pay attention to stocks showing relative price strength. These stocks are often the first out of the gate when new money comes in from the sidelines.

I was impressed with how Silicon Motion Technology (SIMO) traded on Thursday. Shares bucked the trend, rising 1.8% to $19.55 on strong volume. It's a fabless chip company that designs and develops a portfolio of data-processing and storage devices used mainly in consumer electronics.

In its latest reported quarter, profit jumped 138% from a year ago to $0.38 a share. Sales rose 73% to $60.4 million.

Silicon Motion has been consolidating gains for nearly three weeks. It's a strong stock, and it might look like a tempting buy, but I'd rather wait for its base to complete before committing capital. Three weeks is not enough time for a good base to form. A sound base generally needs a minimum of five weeks to take shape.

SIMO Daily

The dollar stores also continue to act well. I sold Dollar General (DG) for a profit in my model portfolio on Sept. 29. I might revisit the stock at some point, because it has been forming a bullish flat base since late October. In a healthy market, a pattern like this can deliver nice gains, but when overall market health is in question, it doesn't make sense to buy here. An easy way to lose money is to buy a technically healthy stock in a downtrending market.

DG Daily

As an investor, my goal has always been to outperform during market uptrends and preserve capital during market downtrends. I'm in capital preservation mode for now, because the market is still in a downtrend until proven otherwise. I tried a few stocks on for size in recent days, and it didn't work out. My capital is still intact, and that's the important thing.

The market's trend will turn positive when the Dow, S&P 500 and Nasdaq break out to new highs in heavy volume. I just don't see it happening -- not with the U.S. dollar chart looking as bullish as it does. The market wants a weak dollar and strong euro, but sentiment is so decidedly bearish toward the euro. Even if there is some good news out of Europe on Friday, it may not be enough to lift the euro out of its doldrums.

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