Stay Out Of This Market!

On January 15th, when the NASDAQ Composite was above 2300, I tweeted that the market looked tired and that we could correct down to 2200-2220. I repeated those cautious comments again on this blog on January 20th (click here to read). While I didn’t expect the NASDAQ to correct 100 points in two days, the warning signs were there and should have kept you out of the market.

Just to review, the warning signs consisted of 1) leading stocks breaking down 2) an increasing number of distribution days 3) very high bullish sentiment and 4) too many breakout failures.

Since my last post, we have observed even more distribution days (which is defined as heavy volume selling by the institutions). If you look at a NASDAQ chart, you will notice big volume down days on 1/20, 1/21, 1/22, 1/26, 1/28 and 1/29. The worst part is that the selling accelerated in volume last week with Friday 1/29 being one of the heaviest volume down days in the past year!

I view this as obvious “dumping of shares” by the large institutions. I said this before and it’s worth repeating: “WHEN THE BIG BOYS ARE GETTING OUT OF THE MARKET, I DON’T WANT TO BE IN!” Why? Because you need institutional support to keep stocks in an uptrend. Right now, this support does not exist. In addition, “breakout failures” in leading stocks such as $PEGA $STX and $MTL confirms the unhealthy nature of this market.

Although we may see some low volume short covering rallies, my best advice is to simply stay out of this market. If you feel that it’s too late to sell and you want to “ride it out,” keep in mind that you will likely deal with more downside volatility over the near-term.

One of my favorite trading rules is: “Always protect your confidence.” By putting our clients in cash in mid-January, not only did we survive the past two weeks, but we will also be more confident when it comes time to re-enter the market. In other words, if the market corrects 10-15%, while everyone is struggling to get back to even on the year, we can start from a stronger position and trade with a higher level of confidence when the market becomes healthy again. Until then, sit out and wait patiently for a better environment. Who knows? It might not be that far away.

Follow me on Twitter @jfahmy

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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