Today seemed like a great day for bulls but I am a little cautious (am I ever not?). Of course the market was up, but under the hood, some interesting things were happening.

First off, in my opinion, the market is merely levitating because that’s what the market does absent of news. If the market is in an uptrend and no major news comes out, it will keep going up. Second, the schizophrenic nature of winners getting rewarded with 10-15% pops and losers getting pounded 10-15% tells me that either analysts were completely surprised (doubt it) or lots of money is looking for something to chase. Today’s hot stock du jour was Allot Communications, which is in an excellent little niche – but like most companies performing well, its PE will push up to 100 before it slows down. Today’s slap when to HFF Corp down over 6%.

I must also remind myself that both of the above points could be read bullishly. The trend is up and there are new highs being made – therefore I would look at this market as a trader, and not fool myself into thinking I am an “investor” (what the heck is that when you have no say in company management?)  – and why not with everyone from the Fed to big Wall Street firms and the US government manipulating market forces, why would one count on fundamental research?

My issue comes with thinking we might have had a false breakout today. Does that mean sell everything? And What is a false breakout? I wouldn’t sell out my own positions because of a hypothesized false breakout FYI. A false breakout is when a market or a stock breaks free from a range in an up or down direction then reverses and heads in the other direction – false breakouts have signaled some very big moves in the past so I’m being very cautious. Also we had the stock that everyone owns (Apple) show some weakness today. Furthermore, i just read on Yahoo that something like 71% of stocks surprised positively with earnings – are Wall Street analysts that bad? Or is there some gamesmanship going on?

I don’t know but I’ve come to learn not to become married to any position, unless I’m Warren Buffet and I can get all of my losers bailed out (GS, AXP, WFC to name a few  -what would Berkshire be worth if all of these huge holdings weren’t bailed out? And remember many of his other big holdings are financial/insurance firms  – Geico anyone?). I can like some ideas more than others but ones I like a lot are few and far between.

Market Summary

In reviewing the market, large cap tech performed nicely with Intel at new highs. Microsoft is near new highs and several other large tech stocks – are doing well. These companies sport reasonable valuations, strong cash positions, good dividends, a global reach and an ability to withstand downturns in the economy.

Large non tech stocks have been doing well lately too. last week, telecoms shot up globally (TLK, a prior holding, and a stock that frustrated me, simply LAUNCHED last week). Bernanke’s pledge to keep rates low gave the green light to dividend payers with strength in VZ, T, TLK (indonesian telecom), MO etc.

Precious metals look like they could go either way. Peter Brandt had an excellent technical analysis of gold on his website a few days ago (read HERE) and he basically said that gold was setting up for an explosive move in either direction. I’m also reminded that, even though intellectually I’m a gold bull, gold prices did drop 50% in 1975 during the great 1970’s gold bull market. So I have become fully a trader in gold stocks and no longer would consider any as an investment – the risk management is too difficult. There is so much emotion in this market that it’s very dangerous for the amateur – and for the pro who might get ground down as stops are hit in either direction.

For other  income ideas, the MLP stocks are catching a bid. Many REITs are strong and Preferreds are in demand also. If we enter a period of flat markets, these could provide some return and may even be bid up. Long bonds were weaker today but TIPs were flat.

Investments vs Trades – My Definitions

Small caps is where I am looking for great ideas, away from the emotions. Large caps I’ll trade as an index but small caps play in markets that are small and growing or in markets they’ve created themselves. Here, the ideas are endless and big traders can not play. And many of these companies have revenues AND earnings – for the true detective, small caps are where the fun is at for me. My largest personal holding is a ~200M cap company.  I’d like to find 8 great ideas like this (an idea that has been impossible for me though I have regrets on a few 5-baggers I did not buy). One or two more excellent ideas would be great then I’d just trade my remaining money.

Bottom line, if I don’t control the direction of a company and have no say over use of cash, it’s not an investment to me. It’s a trade. In my personal definition, investing in my own business is an investment – buying a multifamily home is an investment, but buying a stock, where management often overpays itself, does dumb things with cash flow and makes other awful decisions – that’s a trade. The rare exception is finding a company that executes well and whose CEO and management team do the right things with cash. This is rare. In fact, my large small cap holding was an investment, but recent financing decisions have pushed it a bit into the trade category – time will tell which side it lands on.

Question: How do you define an investment?

At the time of this writing, I or my clients own the following investments or related investments mentioned in this column: VZ, T, MO, Gold