Now before you start saying: “But Joe, you recently put out a blog post talking about why you continue to sit out,” keep one thing in mind…MY OPINION OF THE MARKET CHANGES FREQUENTLY. Why? Because the market is extremely dynamic and can change its character very quickly. You have to be open-minded and flexible. Being stubborn and sticking to an opinion gets you nowhere, especially when the market is proving you wrong. That is why I run screens and go through approximately 1,000 stocks every night. It’s the only true way I know how to evaluate the market’s overall health. When I find an abundance of setups, I feel more positive about the market. When the ideas dry up, I become more defensive.

Last week, I started to find a few decent setups. The end result: I took profits on some stocks ($V $MA $CMG $HANS) and got stopped out of a few others ($BIDU $ACTG $WYNN). I took quick profits because I don’t trust the market yet, and I took small losses because my number one rule is to protect my portfolio. The bottom line: I made very little progress, further telling me the market is not ready to start a SUSTAINABLE uptrend yet.

I realize that many big caps are holding up well ($AAPL $AMZN $GMCR $PCLN), however, as we start to bottom, I would prefer to see leadership broaden out. Currently, it seems very narrow to me. In other words, everyone’s watching the same 5-10 stocks! Historically, that does not bode well for the market.

Wednesday morning (9/21/11), I returned to a 100% cash position when my trading instincts told me to be defensive. As a result, I dodged the subsequent decline on Wednesday afternoon. Going forward, I feel the market needs more time to correct before we will see a sustainable advance. My advice is to remain cautious and keep positions light if you trade. An even better suggestion is to simply sit out, as traders tend to get “chopped up” during these volatile times.

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Follow me on StockTwits @jfahmy

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Follow me on StockTwits @jfahmy

1) Many recent leaders are “late stage” and need to consolidate or build new bases. Examples include $NFLX $CMG $FFIV $AKAM $BIDU.

2) There seems to be a subtle rotation into several commodity related sectors. If the market does pullback, a few areas I would watch include Agriculture ($AGU $CF $MOS $POT $SQM) Steel ($MTL $TS $TX) Coal ($WLT $ANR $YZC) and Mining ($MCP $CLF).

3) A brief correction would shake out some of the extreme bullish sentiment.

In the brief video below, I discuss these topics and go over some charts.

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1) I never thought the Market went into correction in the first place because I only counted 3 recent distribution days on the NASDAQ Composite. I mainly focus on the NASDAQ because it is THE LEADING INDEX and it’s where the majority of winning stocks come from.

2) I’m not a big fan of looking at distribution on the Dow because I think it is THE WORST index to follow and I haven’t traded a stock on the Dow in over 10 years!

3) Over the past two weeks, I have owned between 14-16 stocks for my clients. That is the most number of positions I have owned in a long time. Other wise traders I know have been on margin recently. My point is there are TONS of set-ups and many of them are breaking out.

4) Examples of strong stocks include: $HSFT $AAPL $FFIV $LULU $SHOO $MEAS $TDSC $CMI $SNCR $CIS $KH $RAX $PAY $CMG. I’m not recommending to buy these stocks here, I am simply showing examples of stocks that are acting well technically.

5) The Russell 2000 is at a new high! How can the market be “in correction” when one of its major indexes is making highs?

The point of this article is not to make fun of IBD because I highly respect their work and I have a few good friends who work there. My point is: 1) Pay attention to the price action of stocks! If solid fundamental stocks are breaking out of sound technical patterns on strong volume and holding, that’s a healthy sign…PERIOD! 2) Do your own work and don’t blindly follow anyone or any publication. Use blogs and newsletters as a guide, but ultimately trust your own instincts.

Of course a few things concern me about the market, specifically the economic problems in Europe and the high bullish sentiment. However, the most important thing to focus on is the price action of stocks…and right now leading stocks are acting well. My best advice from here is continue to find high probability setups, take profits into strength, and ALWAYS USE STOPS to protect your portfolio in case your positions turn against you. Good luck trading!

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I know it’s only one day but so far, so good. Your first reaction might be: “But Joe, the Dow was down over 100 points on Tuesday!” My response: “I was paying attention to my stocks and not obsessing over the most over-hyped index on the planet!”

Here’s a quick story: I have a friend who does not trade and has no interest in the stock market. Whenever I talk to him after a big up day, he says: “Wow! I saw the Dow Jones was up 200 points today, you must have had a great day!” And he says the opposite on the big down days. My point is that the average person views the Dow as an indicator of the entire market. 1) DON’T THINK LIKE THE AVERAGE PERSON! 2) The Dow is only 30 stocks and not a great indicator of the other 7,000 stocks 3) Many traders perform well on down market days and lose money on up days. In other words, we don’t always correlate to the indexes.

My main point is to pay attention to your stocks and don’t obsess with the indexes (unless you only trade the indexes). For example, if I only got final quotes on my stocks today and got no index quotes, I would have guessed that the market was relatively flat on Tuesday. Why? Because the majority of my holdings and watch list were barely down and many of them advanced nicely on the day. In fact, my managed accounts finished positive on Tuesday, further confirming the importance of stock selection.

Examples of a few leaders that pulled back on light volume Tuesday: $FFIV $MELI $BIDU $CTXS $CRM $VMW $APKT. Some that bucked the trend and advanced nicely: $NFLX $ISLN $CMG.

So what do we do from here? Watch your stocks. If they are showing you a profit and acting well, try and hang on for a bit. If they break down on heavy volume, lighten up and wait patiently for a better opportunity. As I mentioned on my show, there’s no reason to rush back in and chase stocks. I began to SLOWLY get back in last week by taking light positions and “testing the waters.” So far, my stocks are acting well, but I will cut my losses quickly if they break down. I’ll keep this blog updated later in the week as the market gives us more information.

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2) Stocks are forming bases right now, but they need more time to set up properly. PATIENCE is so important right now!

3) I wouldn’t be surprised to see the market chop around through July. By chop, I mean 1 day up and 2 days down, followed by 2 days up and 1 day down. Again, nothing “sustainable” to the upside.

4) If you insist on trading, keep position sizes small and take quick profits. If you are not comfortable trading that way, then don’t trade.

5) The key in corrective markets is not to make money, but to protect your capital. As Paul Tudor Jones says: “Play great defense, not great offense.”

6) I don’t think we will have another big leg down, but I’m not ruling it out either. (How’s that for hedging myself?)

7) Keep in mind that cash is a position and there is nothing wrong with doing nothing.

8) I do like how many leaders found support near their 20-day moving averages on Wednesday. Examples include: $BIDU $DECK $CRM $APKT $NFLX $AKAM $CMG. Unfortunately, everyone is watching the same 10-15 stocks and this could be a crowded trade. I like these names but I would prefer to see MORE stocks setup.

9) “Wait until as many factors as possible are in your favor before making a trade. It’s the patience that makes the money.” — Jesse Livermore

Please tune into my show “The Next Big Move” this Sunday night at 8PM EST on StockTwitsTV (http://www.stocktwits.tv/). I will be discussing these thoughts in more detail and comparing the current market to a possible 1997 scenario.

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I lightened up my portfolio exposure on Monday for several reasons:

1) Low risk/reward right now. For example, starting a NEW position in $AAPL here at $270 would not be wise as it is running into a high probability of a pullback. Of course the stock could “blow-off” from here and run above $300, however I wrote the word “NEW” in capital letters because I am referring to the risks in initiating a new position now.

2) The Federal Reserve meeting on Wednesday. I don’t believe they will say anything drastic, however the market could sell-off if investors decide to lock in profits ahead of the meeting.

3) The put-to-call ratio closed at 0.66 on Monday, indicating a heavy amount of call buying. Call buying is when traders “speculate” that stocks are going to move higher. I like to use investor sentiment as a contrarian indicator. In other words, when the majority thinks one way, “the market tends to fool the majority.”

4) Sometimes there is month-end selling pressure as money managers lock in their monthy gains.

5) By next week, earnings season will be mostly over and there will be few upcoming catalysts.

Again, I am not turning bearish. I am simply recommending locking in some profits, especially if some of your stocks have made strong +10% to +20% gains or more over the past several weeks. Of course the market could astonish people and continue its resilient ways higher, however I feel it’s worth locking in some profits and waiting patiently for higher probability situations. Who knows? They could appear sooner than later.

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