1) The stock market is never obvious. It is designed to fool most of the people, most of the time.

2) Play the market only when all factors are in your favor. No person can play the market all the time and win. There are times when you should be completely out of the market, for emotional as well as economic reasons.

3) Do not use the words “Bullish” or “Bearish.” These words fix a firm market-direction in the mind for an extended period of time. Instead, use “Upward Trend” and “Downward Trend” when asked the direction you think the market is headed. Simply say: “The line of least resistance is either upward or downward at this time.” Remember, don’t fight the tape!

4) The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.

5) The only thing to do when a person is wrong is to be right, by ceasing to be wrong. Cut your losses quickly, without hesitation. Don’t waste time. When a stock moves below a mental-stop, sell it immediately.

6) Emotional control is the most essential factor in playing the market. Never lose control of your emotions when the market moves against you. Don’t get too confident over your wins or too despondent over your losses.

7) All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.

8) Watch the market leaders, the stocks that have led the charge upward in a bull market. That is where the action is and where the money is to be made. As the leaders go, so goes the entire market. If you cannot make money in the leaders, you are not going to make money in the stock market. Watching the leaders keeps your universe of stocks limited, focused, and more easily controlled.

9) Failure to take advantage of a serendipitous act of good luck in the stock market is often a mistake.

10) There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly build into human nature, that always gets in the way of human intelligence. Of this I am sure.

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1) The 10-week moving average has been an area of strong support for the market all year so far. This level is important because it’s an area of institutional support. In other words, as long as the institutions continue to support the market, I will continue to stick with the uptrend.

2) There were 2 types of stocks I bought: 1) The ones that showed strong relative strength, meaning they barely budged during this recent pullback and 2) Stocks that went down to their 10-week lines and bounced on strong volume. I especially like these stocks because they tend to shake out “weaker hands” before heading higher.

3) As I mentioned in my blog post, I was not turning into a bear. My trading instincts were telling me that we might get a pullback and that’s how I played it. Some people may say that thinking is too short-term, but keep in mind that after my strong run in May, I didn’t want to give anything back. Also, everyone should do what works for them and fits their overall investing/trading timeframe. What I do involves time and not everyone has the time (or is willing to put in the time) to manage their positions in the same manner.

4) Many money managers are underperforming this year. They are lightly invested and DYING for this market to come down so they can catch up and pick up some alpha. My gut tells me the market won’t let them off that easy.

5) Do I think we’re out of the woods? Of course not. However, the way the market responded to this recent pullback tells me we are likely going higher over the next 3-6 months. Perhaps it will be after we continue to digest this year’s earlier gains in a summer range, and then breakout higher. Again, I’ll simply take it one day at a time. If we break down, I can always reduce exposure again and if the market continues to firm up, I can always increase exposure.

Overall, I was very impressed by the market’s resilience last week and the number of stocks that put in such strong technical weeks. Good luck trading!

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1) I talk to many potential investors who ask me “why should I have an active strategy when the market is doing fine and keeps going up?” OF COURSE when the market goes straight up for 4 years, a buy and hold (passive) strategy works well. You’ll pretty much perform in line with the averages and outperform many active strategies. The problem is, when (not if) we get a deeper correction, all those people are going to ride the wave down too.

2) Over the past 4 years, we’ve had some decent corrections (roughly 15-20% in 2010 and 2011). Keep in mind that these corrections did not last long. If you went away for the summer and came back a few months later, the market was back on new highs and you probably said to yourself “what correction?” Remember, time is what kills people. In other words, when a stock or index goes down and snaps back relatively quickly, investors are ok with that. When a correction endures for a while, that does serious damage to investor psychology.

3) People forget things so quickly. During the decade from 2000-2010, the market went nowhere. We had 2 corrections of approximately 50%. During that time, I know some active managers who averaged 10-15% PER YEAR. Again, when it’s great (as is has been recently) everyone wishes they had a buy and hold strategy. When it’s below average (as it was from 2000-2010), everyone wishes they had an active strategy.

4) A passive strategy is great for retirement. Many of my friends have 401k plans at their work (managed by their plan administrator). When they ask me what mutual funds to put it in (as they usually have a selection of 8-15 funds), I tell them to put it all in the S&P 500 Index Fund (if their plan offers that choice). Two reasons for this: 1) For those who say “it’s not enough diversification,” my response is “How is putting your money in 500 Multi-Sector and Multinational Companies NOT diversified???” 2) 88% of mutual funds can’t beat the S&P 500. In other words, if you choose from the other funds that your company plan offers, you have roughly a 9 in 10 chance that it will underperform the index. Therefore, you are better off just putting it into the index and adding to it on a regular basis.

5) Barry Ritholtz wrote a blog post about how hedge funds (an active strategy) have underperformed recently. Many hedge funds I spoke to said their weak performance is due to shorts eating into their long profits. For the hedge funds who are long-only or long-biased, I agree with Barry that their underperformance is due to risk aversion. All I have to say to those hedge funds is: If you are only up +3% while the market is up +15%, you better only be down -3% if the market corrects -15%.

In conclusion, it seems like everyone wants the best of both worlds. They want to be in the market when it’s going up and out when it’s going down. In interest of full disclosure, I am an active manager. I believe you can outperform the market by being in strong stocks during the market uptrends and reducing exposure during the downtrends. Some people say this is impossible and “you can’t time the market.” I hate that expression because it assumes you are getting in at the dead low and out at the absolute high. OF COURSE THAT CAN’T BE DONE! However, you CAN catch the bulk of an uptrend and AVOID the bulk of a downtrend.

Here’s the biggest problem: Doing this involves PUTTING IN THE TIME!!! In addition, you need experience, confidence, flexibility, little ego, the ability to decipher when the market is healthy and when it’s not, the ability to read price action, the ability to select strong stocks, and most importantly…the ability to make decisions! This challenge is why I love active management. No doubt it’s difficult, but I’m willing to put in the time and effort, especially because the market is constantly evolving. It’s against my religion to put client money in mutual funds and ETFs, leave the portfolio, collect fees and then tell them to “ride it out” when we have a correction. That’s what most people do and I refuse to be most people!

I’ll leave you with this thought. I think it’s important in life to find something you’re passionate about and really strive for excellence. Going through the motions and being average like everyone else is completely unacceptable in my book. For me, one of my passions is the challenge of outperforming the market. Very few can consistently do it, but that’s why I love it…because very few can do it.

My email address is: jfahmy@zorcapital.com.

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1) I am NOT turning into a bear. I am simply not finding a large number of strong risk/reward entries right now. I have a nice cushion on my remaining positions and will continue to manage them based on my investment philosophy.

2) I locked in some strong profits over the past few days, as I am having my best trading month since 10/2010. Some people would say “keep pressing,” but as they say “pigs get slaughtered.” I don’t like being too greedy and I certainly don’t like giving anything back.

3) I would certainly NOT fight the Fed and all the liquidity out there. I am not encouraging anyone to short because that has been a torturous experience for most market participants.

4) Keep in mind that I am a swing trader and I am allowed to change my mind. I consider myself VERY nimble and I could be aggressively long or short by 10AM tomorrow. I pride myself on being able to make quick decisions and adapt to the market conditions in real-time.

So, the big question: Is lightening up the correct move right now? FOR ME, it’s a good time to take some off the table based on my trading style. Is it the right time for you? You need to make that decision based on your strategy and your overall goals. As always, DO NOT follow anyone’s advice blindly (including mine) and always know your timeframe. Good luck trading!

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1) Strategy – There are so many different strategies: value, growth, momentum, short selling, etc. Find one that fits your personality and do your best to master it. The fastest way to learn is to study success. In other words, find someone who is successful at the strategy you like, and then mimic them with your own style. Another key is to recognize when the market environment is not conducive to your strategy, and make the proper adjustments.

2) Confidence – If you don’t have confidence, you have very little chance of succeeding. This doesn’t just apply to trading, it applies to EVERYTHING in life (business, athletics, relationships, etc.). With regards to trading, you have to believe in what you are doing and not be afraid to make mistakes. The key is to learn from them, make the proper adjustments, and then constantly reevaluate your progress.

3) Product Focus – There are so many different trading vehicles: futures, commodities, currencies, stocks, bonds, options, etc. It’s ok to dabble in a few things at first, but eventually you need to find out what product works best for you, focus on it, and MASTER it. As they say, don’t be a “jack of all trades and master of none.”

4) Know Your Time Frame – You must find a time frame that fits your personality. If you are too nervous, maybe short-term trading isn’t for you. Everyone wants to make tons of money in the market really fast, but keep in mind that is not a healthy approach. Most people with this mindset tend to be “boom and bust” traders. They make a bunch of money and eventually blow up. If you are truly passionate about trading and hope to be in the game for a long time, I recommend focusing on a slow and steady approach.

5) Ability to make decisions – If you go to McDonald’s, stare at the menu for 10 minutes, and still can’t decide what to order…then you have NO shot as a trader. You HAVE to be able to make decisions. You can’t hesitate all the time and trade with fear. Who cares if you make a bad decision, just MAKE ONE!!! If you are wrong, you’ll learn from it and make a better decision the next time. As Tony Robbins says: “Good decisions come from experience, and experience comes from bad decisions.” The key is to stop trading with so many fears and MAKE a decision. Who knows? You might end up making the right choice, which will increase your confidence and enhance your ability to make sound decisions in the future.

6) Conviction – This is very similar to confidence, but what I’m referring to specifically is to have conviction in your ideas. It amazes me how many people will buy a stock just because someone on TV or Twitter mentions it. Don’t get me wrong, I love to listen to ideas, but it has to fit my strategy in order for me to buy it. Same thing applies when someone says something negative about a stock that you own. Don’t be so easily swayed or talked out of your positions. Have conviction and let the MARKET prove you right or wrong!

7) Ability to cut losses – I’ve studied the best traders in history and they all have the same number one rule: CUT YOUR LOSSES! As a trader, think of your cash as your inventory. If you can’t cut losses quickly, eventually they get bigger and bigger, and you’ll have no inventory left to work with. I have strong conviction in my ideas but when the MARKET proves me wrong, I let go of my ego, cut my loss, and move on.

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EXAMPLE #1 – I speak to many potential investors. It amazes me how many people have been in 80-90% cash for the past 3-5 years. They’ve missed out on such a strong run in the market. When I ask them what would it take for them to get back in, they freeze up and can’t answer. These are people who are NOT in the market, and they are horrified of getting in.

EXAMPLE #2 – Today is May 22, 2013. The general market declined by less than 1% (0.82% to be exact) and my phone has been blowing up with panic by people who are IN the market!!! My trading friends are either calling or texting me with serious worry, and even a few stories of mini “blow-ups” today. I’ve never seen anything like this in my 17 year career! God help these people when (not if) we get a serious correction.

I have discussed this topic on my weekend show and on Twitter recently, and I get TONS of responses as to what has created this fear. Some reasons include: lack of trust in the market, the market is rigged, high frequency trading, it’s not healthy for the market to keep going up like this, and we’re doomed as soon as Bernanke hints that quantitative easing will slow down.

Whatever the reason doesn’t matter. The bigger question comes down to figuring out how to overcome your fears because fear is unhealthy to your general livelihood. If you find yourself fearful, you might need to ask yourself a few questions: Maybe the market isn’t for you? Maybe you need to reduce your leverage? Maybe you need to reduce your position size to deal with the volatility? Maybe you need to get better entries and stop chasing extended stocks? Maybe you need to stop watching 1-minute charts tick by tick? Maybe you need to view your trading as a business, and not gamble so much?

Whatever the reason, one thing I can guarantee is that you’ll never be successful at trading if you are doing it with scared money or too emotional with your approach. I do everything possible during the trading day to keep a level head and a strong state of mind. As a trader, you must find a way to do this or else you will be trading too much on emotion and increase your chances of making bad decisions.

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