By Ian WyattNEW YORK ( TheStreet) -- Did you know that just three trading days ago, on Jan. 19, the Russell Small Cap Index was within 6 percentage points of its all-time high of 855? Surprised? I would think so. Given the severity of the recent recession, it seems that stocks have defied gravity to roar back to such lofty levels. Take a look at the five-year chart below and you'll see what this rally looks like in a historical perspective. A quick look at this chart, and the perspective that small cap stocks were so close to breaking out to an all-time high, might make you think that stocks are wildly overvalued. The market certainly thinks so, as small-caps have fallen 4.3% over the last three sessions. In fact in some cases stocks are wildly overvalued, and to be perfectly honest I wouldn't rush out to buy an ETF right now that tracks any of the major indices. Chances are this will be dead money, and the risk-return potential doesn't justify that type of investment right now.
Why? As I wrote on Thursday:
Sell out of the positions you don't have conviction in for the next 6 to 12 months. You can use this cash to buy shares of stocks you have more confidence in. Consider taking profits on some of your positions, if you have profits to take. This doesn't mean selling all of your shares. Depending on your conviction in the position, think about selling around 50% of your shares. Do your research and be ready to buy more shares of the stocks you want to hold for the next 6 to 12 months. If you did the above, you should have capital available to use without having to take this out of savings, or waiting to generate it through your normal income streams. Average into the positions you decided you want to own for the next 6-12 months. This could mean adding to positions you already have and want to continue to own, or starting positions in new investments. Consider buying in two to four tranches to average out your cost basis. Doing the above will help you mitigate the risk of buying too many shares when the broad market gets stretched. But the strategies will also help you stay in the market to take advantage of the inevitability that many stocks will continue to rise. After all, if you're not in the market, you have no chance of making any profits at all.
"My outlook is that individual stocks will decouple from the major indices and will start to move on more stock and industry specific news. I believe that the broad market will become increasingly volatile as this decoupling happens, and that index investors will not see much difference in the value of their holdings."I think this de-coupling will go on for the next few months, so there is no huge rush to try and rebalance your portfolio all at once. A couple of tips to help you get started: