Next pullback- Buy Aggressively, but for now, Patience is the name of the game

The last few weeks have been all about raising cash for me. Given the market's continued run, we are now clearly in a unattractive risk/reward zone and we have been there for a few weeks. All of my indicators are flashing caution and I learned to respect my indicators as well as what my gut tells me. And my gut tells me to be disciplined and patient and not chase this market. The technicals and fundamentals are both feel pretty stretched.

Lets take a closer look. At 1150 SPX is near its upper volatility band and seems to lack both the conviction and the volume to accomplish a breakout. The stochastics and other momentum oscillators are also in the overbought territories. The previous high set right around this level back in mid January, is not only a tough technical, but also a tough psychological level for the index to overcome. Applying a quick and dirty forward P/E to get the sense of where we are in terms of valuation, we get to 15x on 2010 forward earnings. I think at 15x the market is in a 'no man's land' in terms of valuation and no one can make an argument that it is undervalued. Although this is by no means a precursor of a major correction, I think there will be an opportunity to buy lower or at least at current level, but perhaps with a clearer technical and fundamental picture.

During most of last week, I have been selling relentlessly, using the intra-day rallies, any kind of M&A speculation or anything else that smelled like a quick, transient spike. By the end of this week, most of my 'home run' trades, as well as spec trades (low conviction positions) found their out of my portfolio. For the first time in a long time I am approaching 50% cash level.

So the strategy for now is to wait it out. I see three potential scenarios: 1) if market manages to breakout on decent volume, I will be buying the next consolidation move to the resistance line ~ 1150 on SPX; 2) If the pullback occurs, which is a more likely scenario, even better. Anything around 1120 or lower, would likely convince me to start putting some the cash back in, with 1112, a 50 day moving average an ideal entry; 3) lastly, another way I could see the technical pattern resolving as a cup and handle, with a continuation of low volatility trading in a very tight range, downwardly sloping to around 1120-1130 level. This pattern usually breaks out to the upside, and is one of my favorite technical trades.