Recommending Caution and Patience

• Posted by Joe Fahmy
• on January 20th, 2010

My apologies for not writing in a while. As I mentioned in my last post, I have been focusing my attention on my growing money management business. We recently partnered with a well established RIA (Registered Investment Advisor). If anyone is interested in any of our managed account products, please email me directly at jfahmy@zenithasset.com.

Also, in case you missed it, I did an interview with Howard Lindzon last week on StockTwitsTV. The interview starts around minute 30:00 (click here to watch). My Twitter name had a typo on the screen. The correct spelling is @jfahmy if you would like to follow me on Twitter.

Back on December 19, I wrote about an Upcoming Rally and that the market could breakout to the upside over the next 3-6 weeks (click here to read). Since then, the NASDAQ Composite gained over 100 points, and many of the stocks mentioned in my blog performed very well: $AAPL $GMCR $CML $HGSI $SWM $LULU $RAX $BCSI $CERN.

Over the past few days, I have been locking in profits (or getting stopped out of some stocks) because I feel the NASDAQ Composite could correct to the 2200-2220 range. This is a logical place to retest and find support because it represents the NASDAQ's 50-day moving average, its 10-week moving average, and the recent breakout area from mid-December.

More importantly, I ALWAYS observe the price action of leading stocks and the volume of the major indexes to make decisions about my investment levels. Here are some observations:

1) Many Big Cap leaders are consolidating/correcting and could be building the left side of new bases (for example $GOOG $PCLN $AMZN).

2) Many China leadership stocks are either breaking down or need time to digest their recent gains (examples include $HMIN $RINO $CGA $CAAS $CTRP).

3) We have seen 3 days of distribution (heavy volume professional selling) in the past 6 trading days: 1/12, 1/15 and 1/20. In between these days, the up days have occurred on lighter volume: 1/8, 1/13, 1/14, 1/19.

4) The main sentiment indicators that I look at are showing too much bullishness. The Investors Intelligence Bull/Bear ratio is very high. In addition, the Put/Call ratio has been low over the past two weeks, indicating more call buying than put buying.

I realize that the market has been incredibly resilient over the past 8-10 months. Therefore, I will keep a watch list of stocks holding up well in case the market does not correct. Currently, some of these stocks include $RAX $DNDN $CLNE $ASH $V $DSW $GMCR.

My best advice is discipline and patience. By discipline, I mean cutting losses on your weakest performing stocks and raising some cash. By patience, I mean NOT trading and waiting for better opportunities. If you are inclined to trade, I strongly suggest keeping your position sizes small until the market shows better signs of strength. Again, I realize that the market has been resilient, however, I would like to see more stocks “setting up” and better upside volume before increasing my capital commitment and market exposure.

Tickers: AAPL, AMZN, ASH, BCSI, CAAS, CERN, CGA, CLNE, CML, CTRP, DNDN, DSW, GMCR, GOOG, HGSI, HMIN, LULU, PCLN, RAX, RINO, SWM, V

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