As of 7:50 a.m. ET, the markets are stable, which is a good sign for now. The situation with Col. Moammar Gadhafi needs to be monitored closely. This morning’s Wall Street Journal (WSJ) provides a good visual of the unrest:

On the ground in the eastern chunk of this oil-rich desert nation, the signs of rebellion are plain to see in the armories of a military base near Baida: Weapons crates lie busted open and empty. Rifles are missing from their racks. Left behind are helmets and gas masks and cleaning kits—things that can’t shoot.

Based on the combination of (a) problems in Middle East, (b) weak housing data, and (c) an unfavorable risk-reward environment, we did some selective selling yesterday. We took some profits off the table and reduced exposure to copper (NYSE:JJC) and agriculture (NYSE:DBA). We still own both positions, just not as much. Selling a small amount allows us to step away from risk incrementally, which has a few benefits:

• If Tuesday’s slide extends into today, and possibly morphs into something bigger, we have broken “mental inertia” with the sell button. Hypothetically, if we see big declines today, our mental set is “we sold some yesterday and we can sell more today if needed”.
• If yesterday turns into a one-day pullback, mentally, we are fine with that since we only sold a small portion of our portfolio yesterday. We would be happy to make money if the market can hold.
• One of our biggest enemies in trading and managing money is indecision, or the inability to take action when the situation calls for it. If you sold nothing yesterday, and the S&P 500 is down 30 points again today, you may shift into “it is too late to sell mode”, which can be a dangerous place to be.

The CCM Bull Market Sustainability Index (BMSI) hit 4,195 last Thursday. As the table shows below, markets with similar profiles have been difficult to make money in (not impossible). For this condition to be cleared, the markets need a pullback (Tuesday) or a period of sideways consolidation.

From a strategy perspective, we will continue with the incremental approach. If the markets can move higher, we are happy to stay with our longs in gold (NYSE:GLD), silver (NYSE:SLV), and energy (NYSE:XLE) to name a few. If a pullback does become a correction, we mentioned some possible buy candidates in Bears May Be Taken To The Woodshed During Next Correction, including Vanguard Total Stock Market ETF (NYSE:VTI), Industrial Select Sector SPDR (NYSE:XLI), and Energy Select Sector SPDR (NYSE:XLE). The article (Woodshed) also shows a possible range of major support for stock prices, which may come in handy sometime in the next few weeks.

Written By Chris Ciovacco From Ciovacco Capital Management, LLC

Chris Ciovacco began his investment career with Morgan Stanley in Atlanta in 1994. With a focus on global macro investing, Chris uses both fundamental and technical analysis to assist in managing risk while looking for growth opportunities around the globe in all asset classes. If you are looking for an independent money manager or financial advisor, Ciovacco Capital is worth a look. Chris graduated from Georgia Tech with Highest Honors earning a degree in Industrial and Systems Engineering in 1990. His experience in the professional ranks began in 1985 as he began working as a co-op for IBM in Atlanta.

Ciovacco Capital Management, LLC (CCM) is an independent money management firm serving clients nationwide. By utilizing extensive research, disciplined risk management techniques, and a globally diversified approach, CCM prudently manages investments for individuals and business owners. Our focus is on principal protection and purchasing power preservation in an ever-changing global investment climate.

JJC, NYSE:DBA, NYSE:GLD, SLV, VTI, XLE, XLI