Listen to the Warning Signs

• Posted by Joe Fahmy
• on January 21st, 2010

As I mentioned in yesterday's blog, the market is flashing plenty of warnings signs:

1) The majority of stocks are in "correction" mode right now. Wait patiently for stocks to set-up again and offer attractive "low-risk" entry points.

2) The distribution days are piling up with Thursday (1/21) being one of the highest volume down days in a while. Distribution is heavy-volume institutional selling. When the big boys are getting out of the market, I don't want to be in.

3) There's been recent excessive bullishness in the Bull/Bear numbers, the put/call ratios, and the VIX is signaling complacency among investors.

4) Most of the stocks that were on my "holding up well watch list" on Wednesday got hit on Thursday. This makes me feel the market will eventually get to everything.

I realize that the market has been very resilient and that we could see a low volume rally over the near-term. My best advice is to sell your weakest performing stocks and raise cash for the next uptrend. When will that come? I'm not a fan of making predictions because I would rather observe the day-to-day action of the the stock market and let that make my decision for me. We could see a 4-8 week correction that could bring us down to 2200-2220 on the NASDAQ Composite. Another scenario could be one similar to Feb-August of 2004, when the market digested the huge 2003 run up by correcting for 6-8 months.

Either way, I'm recommending caution, raising cash, taking a break from trading, and waiting patiently for better opportunities. I am not a big fan of shorting because I feel it is too challenging and frustrating. I will talk about this in a future blog post. In the meantime, play good defense!!!

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