From Cabot Top Ten Trader Update

Selling pressures have exploded, pushing the market into a waterfall-like decline during the past few days.  There haven’t been any super-scary 400-point Dow declines that grab the headlines, but nearly every day the market has lopped off another 0.5% to 1.5% as worries about Europe and Greece dominate the news.

Obviously, the sellers remain in control, and as this downturn has deepened, more and more stocks have fallen by the wayside.  Thursday was crushing in this regard, as many of the stocks that had been holding up well were taken out and shot, though other names are still acting normal (or as normal as you can be in this environment).

For our part, we’re not going to predict where this market is headed. The intensity of the selling and the panic surrounding Europe tells us a bottom (at least in the short-term, possibly longer) could be near, but we know that once these waterfall declines get going it’s best not to stand in the way until some buyers step up.

We’re glad to have turned cautious a couple of weeks ago; of course it would have been nice to have sold everything three weeks ago but that’s not realistic. At this point, we wouldn’t panic out of everything—it’s tempting, but experience tells us that keeping any resilient names you have on tight leashes is a better bet. Sure, you might get stopped out, but the risk from this point is relatively small compared to the potential from a short-term bounce ... or something larger.  We would, however make sure you have a large cash position (say, 40% to 60% or even higher) to protect your portfolio.

As for new buying, we would only do some if (a) you already have a ton of cash on the sideline and (b) you keep your position size much smaller than normal and (c) you’re talking about a high-quality stock that’s held up well and has good liquidity. Again, with a waterfall decline, it’s usually best to wait for some show of support rather than guessing where a bottom will come in.

Lastly, make sure you don’t lose hope right now—yes, we know the action is ugly and it will probably take some time to repair the damage. But, believe it or not, the selling pressure we’ve seen in recent days hasn’t been out-of-this-world intense; for instance, there were a large 158 stocks that hit new 52-week lows on the NYSE yesterday, but during last August’s plunge, there were more than 1,000!  

Our point isn’t to minimize the damage, which is significant. But the decline hasn’t been so severe at this point that it’s sure to take months of repair work (like it did during the second half of last year). Thus, make sure you keep your watch list up to date.