Let’s get the bad news out of the way. Telecom firm Nokia (NYSE: NOK) has stumbled on several fronts, triggering a stop-loss in my $100,000 Real-Money Portfolio, so I’ll be selling my 800 share position 48 hours after you read this. More bad news: the recent market pullback has affected my $100,000 Real-Money Portfolio, so I’m now roughly break-even while the broader market is modestly in the black.



I remain hopeful that readers understand I’m building a portfolio for the long haul. As I (mostly) seek out stocks with strong downside protection, I run the risk of missing short-term market spikes when investors embrace risk.

Now for the good news: my current roster of holdings appear fairly solid in terms of risk, and in every instance, I see ample potential reward — for patient investors.

#-ad_banner-#Nokia’s rotten timing
Nokia has been under an intense spotlight in recent months as it aims to make a dent in the Apple (Nasdaq: AAPL)/Google (Nasdaq: GOOG) smartphone duopoly. Reviews of the company’s Lumia line of smartphones have ranged from good to very good, and all signs have been pointing to potential success. So the discovery of a software glitch in those phones, which has led the company to offer face-saving $100 user credits, is surely unfortunate.

Make no mistake: I still think Lumia has a real shot at success, especially in markets such as China. But the company now has even more to prove to investors, and I have no desire to fight broader sentiment. If there is a silver lining to the bad news, then it is that Nokia (even before Wednesday’s sell-off) was the smallest holding in my real-money portfolio. The funds that will be freed up from the sale will give me additional firepower to pounce on bargains that emerge during the first-quarter earnings season.

Lastly, I will no longer be adhering to stop-loss limits that I have recently spelled out in my picks. I’m adhering to the policy with Nokia, but don’t want to have my hands tied in such a fashion in the future in the event that other portfolio holdings hit a rough patch.

Alcoa’s good news
Despite a tough environment for aluminum pricing, Alcoa (NYSE: AA) still managed to handily exceed consensus profit forecasts. Management has done such an outstanding job of restructuring the business in recent years that the company can still squeeze out profits during a very challenging economic environment. Shares are staging a nice relief rally on Wednesday (April 11), up more than 7%, though some of that gain is due to covering by short sellers.

To be sure, it’s hard to get overly excited about Alcoa’s results when aluminum flirts with $0.90 per pound on the spot market. I still think industry supply cuts will help stabilize and eventually boost pricing back toward the $1.10 per pound mark. At that level, Alcoa’s earnings power would exceed $1 a share, perhaps in 2013. And at that point, analysts would begin speaking of earnings power approaching $2 a share by mid-decade. That’s why I think this stock will move into the mid-teens or higher in 2013 as that view starts to crystallize. But there’s no reason for me to add to this position right now, at least until I see aluminum prices start to strengthen and move toward the $1 per pound mark.

A bearish bet stays in place
I remain cautious as we head into earnings season. The recent market weakness may be telling us of tougher times ahead, so I’m sticking tight with my position in the Direxion Daily Small Cap Bear 3X ETF (NYSE: TZA). This fund shot up 21% in just five trading sessions before a 3% pullback on Wednesday, and I need to keep it in place until I see a more positive tone to economic reports. Signs have emerged of an incipient slowdown in the U.S. economy. Small business owners, for example, have just grown more cautious, as I noted yesterday.

Risks to Consider: Please recall that our policy dictates that we refrain from making any moves until 48 hours have passed, giving you time to trade ahead of us. That’s crucial to remember, as it may be wise to sell this bearish ETF if the market falls very sharply on any given day. Those kinds of sell-offs often represent “capitulation,” whereby negative market sentiment snowballs until all excesses are washed out. A quick market rebound is often the next move, so you’d want to be out of this ETF before that happens.

[block:block=16] Action to Take –> As I stated earlier, I’m selling my stake in Nokia 48 hours after this is published.

This is an awfully tricky market. I encourage you to continue to focus on stocks that have considerable downside protection if the recent market pullback resumes. Yet such an environment also brings fresh opportunity, which is why it’s crucial to have spare cash on hand to put to work quickly.

Lastly, keep an eye out for upcoming earnings releases for several of my portfolio holdings. These include Citigroup (NYSE: C) (Monday, April 16), Cree Inc. (Nasdaq: CREE) (Tuesday, April 17), with Hasbro (NYSE: HAS) and Ford (NYSE: F) set to weigh in roughly a week later. By then we should have a much clearer read on the tenor of earnings season, including any adjustments that might need to be made.

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