Playing a dangerous game

I'm 70% in cash and I'm playing a dangerous game with my account. You might be thinking "wtf are you talking about? How can being so heavily in cash be dangerous?" I'll tell you why. It's because by being so heavily in cash, I'm (temporarily) siding with the dumb money - main street and I risk missing out on the bull market. I told you early in the year about how according to polls, over 60% of Canadians and Americans still believe their economy is in recession. I'm quite sure that hasn't changed....if anything even more are gloomy given that consumer sentiment recently dove to 2009 levels. Here's another tidbit of dumb money sentiment I just read in an commentary piece.

"CNBC recently reported that investors were more concerned about the economy than at any other time during the past five years; a CBS poll found that 39% of Americans believe the economy is in a state of permanent decline"

Wow, this is powerful, powerful stuff isn't it? I don't think I'll ever see such a divergence in stock market action vs public sentiment in my life again. Maybe I'll be wrong about that because in the last 12 years I saw so many "once in a lifetime" things happen! It's bizzaro world folks. 12 years ago, there was this belief that we had entered a "new era" of permanent prosperity thanks to the marvels of technology and the internet. Mainstreet was dead wrong as they most often are. Now we have all this gloom and hopelessness out there and yet here we have a stock market that is flirting to make a new bull market high. It's becoming more and more clear to me that a bullish resolution is going to be the end result of this sideways action we've been seeing since March. I'm sure there will be headfakes, whispsaws and scary moments on the way to this bullish resolution but the odds seem quite high to me that the bulls are somehow going to win simply because bear markets don't start with gloom and despair - they end with gloom and despair!

I'm not sure as to the exact timing of the bullish resolution though....but I still think we'll get at least  one more meaningful dip in the market before we do see the market break out for good. I run the risk of being on the sidelines too much if I'm wrong. That's what happens when you try to trade in a bull market. I've always said that you'll have a hard time beating buy and hold in a bull market. If I get punished for missing out, I deserve it because I didn't have the courage to fully believe in my convictions and I tried to be too cute timing the market. But in my defense, I simply could no longer stay status quo given the size of my paper profits and the IT concerns I had about the market and so I had to realize some of those profits. Discipline  (i.e. prudence)  vs conviction....you need to have the proper balance between the two.....too much of one vs the other can be detrimental to reaching your full potential. It could very well turn out to be the case that I had too much of the former....it's usually the case.

In the meantime, I'm still looking for new candidates to add to my account. What I'm looking for are small/micro cap plays that are fundamentally undervalued with little/debt,  huge potential and good price action. Stocks that are in solid downtrends, no matter how fundamentally appealing, are avoided. This has been my winning formula... I would simply buy such stocks and hold them for several months adding to my positions only if they went up (one of my rules is to never average down, since that is the equivalent to rewarding bad behavior).

So far, I've found 3 small cap stocks that have great upside potential but are still in the bottoming process. Discipline prevents me from taking a position until the price action is better. However, there's always a reasonable chance that an undervalued stock can do an explosive V shaped bottom and not the ideal saucer type bottoms I prefer. Therefore, I do have a rule that allows me to make a "conviction" buy when the chart is not the most appealing but only a partial position (no more than 5% of capital per stock) is permitted until there is favorable price action. I may end up using up to 20% of my cash position to make such conviction buys with these 3 stocks if after I complete my DD I feel real strongly about them and the risk of the V bottom is high.