Part of my investment philosophy is to look at the positive and negative signs in the market and adjust my investment levels accordingly. It is important to keep an open mind when doing this. Don’t get too caught up in what “you think the market should be doing.” Flexibility is important but being stubborn gets you nowhere. Here are some observations:

1) All the major indexes are below their 10-week moving averages. This is important because this is an area of institutional support. The major index that is holding up the best is the Nasdaq 100 ($QQQ). While doing my weekend work, I noticed many stocks in this index held up well last week. A few examples include $EBAY $NFLX $AMZN $FB and $GOOGL.

2) Many stocks in leadership groups such as Software, Biotech and Healthcare got hit last week. You can see this in their respective ETFs ($IBB $XBI $XLV), which sold off on high volume.

3) Some of the selling last week felt like forced liquidation. It’s possible that some funds are expecting a rate hike in September (which I don’t expect) and were reducing their leverage in anticipation of this move. It’s also possible that some funds were in trouble from their big macro bets and were forced to sell some of their winning liquid positions.

Here’s the “but” part from my title:

4) Over the past 3 years, every time we see traditional warning signs (such as institutional selling, leaders breaking down, and the major indexes looking like they want to fall apart), a magical bid shows up to support the market. One of these days, this bid will NOT show up and the market WILL correct, but it hasn’t happened in a long time. That’s why it is so important to be flexible in your approach and to be nimble enough to shift gears when needed.

5) Another huge positive is that almost everyone I talk to and everything I read is negative right now. People are frustrated with the market, tired of Fed intervention, and getting impatient with their most widely held stock $AAPL. You might think I’m kidding, but the lack of progress in the most loved stock on the planet is really hurting investor morale.

CONCLUSION: While I think it is important to be cautious and defensive right now, I don’t think it’s wise to turn your back on this market. It’s been incredibly resilient and the S&P 500 ($SPY) is only a couple of buy programs away from being at all-time highs (although the average S&P stock is down -14.5% from its highs. I know, makes a lot of sense, huh?). Keep in mind that we are still in a liquidity driven environment fueled by a globally coordinated effort to keep rates low and the markets high. There’s nothing wrong with being cautious and raising some cash, but I wouldn’t get too negative.

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