Investors should carefully track momentum in the current market, and be prepared to make buy decisions on strong uptrends, says James "Rev Shark" DePorre. Though small caps performed poorly in the market downturn, he likes the prospects of some names if the uptrend holds, and shares his views on three current picks.

Kate Stalter: I am speaking today with James “Rev Shark” DePorre, and he is the author of one of my favorite investing books, Invest like a Shark. He also runs the popular trading site at sharkinvesting.com, he is an asset manager, and a columnist at RealMoney.com.

Now Jim, you believe that the general market conditions these days have turned positive after undercutting the August lows and rebounding. I know that you have also written lately that maybe the technical picture for some of the individual stocks may not be so good; so give us some detail on that.

James “Rev Shark” DePorre: Well, right now I am starting to become a little more bullish about a possible run until the end of the year. I think the recent breach of the annual lows that we saw about a week ago was what we needed to get the kind of washout that will help put in a bottom.

The other positive that we have right now is that we have a lot of companies that are reporting good earnings. I think there has been a disconnect between the sentiment about the overall economy, the European situation, and so on, and what actual companies are reporting.

Earnings have been good, but people have been understandably bearish because personal observations about the economy don’t look so hot. I mean, who can be highly positive when housing, the job market, Europe, and the economy are doing so poorly?

But there are companies that are doing well. I think because people are out of position, there is a potential for some of these to really start to move into the end of the year.

Kate Stalter: Now you just talked about the upcoming earning season. Any specific moves that retail investors should be making right now within their portfolios to prepare for that?

James “Rev Shark” DePorre: Well, I tend to be more of a small-cap investor. What I really am looking for are stocks that have exceptional EPS growth or good revenue growth, and most importantly, are set up well technically.

Most small caps have been performing very poorly for a while. I tend to buy momentum rather than bottom fish, so I want to see a lot of these stocks improve before I will start putting my money into them.

One stock, in particular, that is at the top of my list for this quarter and into next quarter is Mitek (MITK).

They have technology that allows you to use your smartphone as a scanning device. Right now, that is being used by some of the major banking institutions to allow you to scan in a check and deposit it directly into your bank account. You may have seen some of these commercials they have on TV about that.

I think this technology is going to start become much more accepted, and I believe that stock is in the very early stages of being discovered.

Here’s another one, a very small company: EasyLink Services (ESIC). This is basically a cloud-computing play. They allow data to be shared using the cloud system.

They just reported exceptionally good earnings, following an acquisition of a competitor. They just reported last week with some good numbers. I think that one will do well as the small-cap market comes back.

Let me give you one more: C&J Energy Services (CJES). That is that is up strongly today due to an acquisition of its competitor, Complete Production Services (CPX), which is in the oil-services sector.

What CJES does is fracking—they introduce water into gas and oil wells to help production. There are some exceptionally strong numbers on that one.

I think that now that this one has bottomed and seems to be reversing, it is going to be on my radar as the technical picture starts to improve. It is supposed to earn over $4 next year, and the stock is currently selling for about $17, so it is a very cheap on a P/E basis.

Kate Stalter: Jim, you just talked about the stories behind some of these moves, and also some of the fundamentals, as well as the expectations. On the technical side, what are you looking for in terms of a stock that you are eyeing as a possible setup?

James “Rev Shark” DePorre: What I want to do when I invest is, I tend to believe that there is always someone who is going to know more about a company than I will. There is always big money out there that has the ability to do research that an individual investor can never do.

So what I am looking for are some signs that those elephants with a lot of cash are putting their money to work in a stock. So what I want to see is an uptrend. I want to buy stocks when they are going up. That has been very difficult in the recent environment, because we just don’t have much leadership right now.

If you want to get in, it has been the real dilemma of this market for many technical traders. Ever since the bottom back in March of 2009, we tend to have very peculiar moves where we go straight up and straight down with little basing action or little consolidation along the way.

So it has been much more difficult to play some of the standard charts. You have to be much more willing these days to chase momentum once it starts.

It tends to persist to a much greater degree than it has in the past. I think that is probably a function of high-frequency trading and computerized trading, which has become a much bigger part of the market. These computer programs tend to accentuate the moves. Once they start, they keep pushing and pushing while they extract their gains.

So technically, I am looking to chase strength much more than I would in the past, to stick with positions longer than I might otherwise. There has been a real change in the way you have to trade technically, and it has been a hard adjustment for many people, including myself. I think that is going to persist.

I am more hopeful that one of the other issues that really comes into play is that individual stock picking has taken a backseat to a lot of the trading off of the headlines. The European situation tends to push us one direction or the other and all stocks tend to be correlated.

So individual stock picking really has not been rewarded very much; it is a much more of a game of trying to time the market and to play directional moves. The advent, or the popularity, I should say, of ETFs is really having much influence on that, as well. There are a lot of things going on out there.

Kate Stalter: There sure are. Let me just ask you one follow-up question to what you just said, Jim: Should retail investors be prepared to sell on pullbacks to keep their gains, or to be patient and sit through a pullback? How do you trade those situations these days?

James “Rev Shark” DePorre: Well, the most important thing that an individual investor needs to do is have a methodology. I don’t think there is any particular style of trading that is inherently superior; it really depends on the execution of your particular style.

I know there are traders who will never want to average down positions, whereas there are other traders, that is their primary methodology. It really boils down to whether you are trading purely off technicals, or if you have enough confidence in your fundamental analysis to average down into positions. My tendency is to only add when stocks are going up.

Now, I will allow some smaller positions some leeway to go through pullbacks and so on. But the one thing that I don’t worry about is if I get stopped out of a position, I am always confident I can re-buy it if I still think the stock is worthwhile. A lot of times, I think it is more important to be disciplined about honoring your stops, sell out, and just come back and re-buy later on.

In fact, selling is just a cheap form of insurance; it allows you to escape the potential of a loss. If you have to buy your stock back at a higher price, that is just the premium you paid for a little protection in the interim.

The way you handle averaging in, I would like to average in slowly and average out slowly; it helps a lot to do that if you have an uptrending market. In a down-trending market, you just have to be much more disciplined in implementing your methodology.