Thoughts on Tuesday’s Selloff

In my Fourth Quarter Game Plan (a blog post I wrote on 9/16/13), I outlined a bullish case going into year-end. I specifically stated: “The main two things that could derail the markets would be a geopolitical event or a mess in Congress.” Today’s market (10/8/13) stressed the importance of being flexible, open minded and nimble as a trader. This isn’t about having an ego with market calls, this is about risk management and protecting the downside.

1) I mainly use the price action of leading stocks to determine the overall health of the market. Many leaders were weak today and broke below recent support levels on heavy volume. Examples include Big Caps $AMZN $GOOG $PCLN $V Social media related $LNKD $YELP Chinese stocks $YY $SFUN $QIHU and Biotech $BIIB $AEGR $ACAD. Some might say these are very speculative names, but I use them as a measure of leadership and risk appetite. Their overall long-term charts are still intact, but they simply need time to repair Tuesday’s damage. As they say, if you can’t make money in the leaders, you will have trouble making money in the overall market.

2) I took some profits last week and moved my clients to 100% cash earlier this morning as I got stopped out of my remaining positions. Three things to keep in mind: 1) Cash is for traders and not for everyone 2) I had a great run recently and don’t want to give it back 3) My investment levels can change quickly. Making decisions and getting back in the market is not something I have a problem with. I used to, but not anymore.

3) The big question now is where do we go from here? The damage today tells me the market needs time to heal. I’m not sure how long it will take, but I do know there is nothing wrong with being cautious until we get a clearer picture.

If Congress continues to point fingers and create uncertainty, we could go much lower. However, I am also keeping in mind that this market has been resilient for so long and I’m not ruling out that this could be one big convincing shakeout before a year-end rally. That’s the best part about being flexible and open-minded. If conditions improve, I can be nimble and get back in. For now, I feel that patience and discipline will separate the “consistent winning” traders from the “boom and bust” traders. Good luck!

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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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