I discussed the following in a Market Video over the weekend. Here is a summary of the important points:

1) In my 18 years of trading, there have been 4 years where the market grinded higher for almost the entire year: 1999, 2003, 2009 and 2013. It’s important to look at what happened the FOLLOWING year not only to understand market history, but also to try to ANTICIPATE what could happen this year. In all of the subsequent years, the market had trouble making progress.

AFTER 1999 – In 2000, we saw a major correction after the market peaked in March. I don’t think that will happen this year because we didn’t have a “blow-off” move in 2013. Although 2013 was a strong year, it was nothing like the +86% year we saw in the Nasdaq Composite of 1999.

AFTER 2003 – In 2004, we saw a correction that wasn’t severe in its decline but more in its time, as it lasted 6-9 months. The S&P 500 only corrected -9%, but the three legs down from January-August of 2004 frustrated many market participants.

AFTER 2009 – In 2010, the market peaked in April, only to see a very volatile summer. The market eventually bottomed in late August when Chairman Bernanke announced the beginning of QE2. The problem is many traders I know got tossed around and lost a great deal of confidence that summer, mainly due to the increased volatility.

2) I see two scenarios for the market from here: A) We have already started a correction that could be similar to the ones we saw in 2004 or 2010 or B) The market makes a new high into April/May (due to traditionally strong seasonality, IRA inflows, and anticipation of strong Q1 earnings results) AND THEN we begin the correction. Keep in mind, the correction could simply be through time and not a severe decline (as in 2004) or it could get a little volatile (as in 2010).

3) I am not an economist, I don’t have any magical indicators, and I do my best to shut out all the day-to-day noise. I am MAINLY basing my opinion on the price action of leading stocks. Right now, I am finding very few safe entry points in quality institutional growth stocks. I love many of these companies and I think they can go higher over the long-term, but they simply need time to digest their recent gains.

4) What would change my mind? If I see better technicals in the market, specifically more stocks setting up and institutions accumulating shares rather than all the recent distribution. I am very open minded to this happening and have no problem shifting my stance if I see better health.

5) What to do now? Know your philosophy and know your time frame. Don’t follow anyone blindly (including myself). If you’re a long-term investor, accept that you might have to sit through a little volatility over the next 6 months. If you’re a trader and stocks continue to correct, reduce your exposure and cut your position size.

One final piece of VERY GOOD NEWS. If I am right and we see a correction over the summer, keep in mind what happens when we come out of corrections…we see brand new strong uptrends! There will be an amazing opportunity to make money and plenty of strong stocks will explode to the upside. Until then, it will simply require a little patience and discipline if the market continues to have trouble making progress.

I can be reached at: jfahmy@zorcapital.com.

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