I’m beginning to think the weekends are giving people amnesia about the stock market. We started this year with two BRUTAL weeks of selling. After the MLK long weekend, the market gapped up the morning of January 19th and sentiment seemed VERY complacent. It was as if the long weekend made everyone forget all the selling during the first two weeks of the year.

That day, I told my friend we need to see the market gap down and STAY down before any fear shows up. The next day (Wednesday Jan 20th), the Dow Jones dropped -550 points and FINALLY some fear started to appear (based on many sentiment measures). Unfortunately, the same pattern repeated itself. The small recovery we saw last Thursday and Friday combined with the weekend seemed to erase everyone’s memory again. Based on the sentiment measures I look at, there was a feeling of complacency this morning (1/25) and the market proceeded to decline for the remainder of the day.

Don’t get me wrong. I don’t WANT the market to go down. I just feel the market needs to create more fear before a bottom is reached AND THIS WILL TAKE TIME. I can’t stress enough the importance of remaining defensive and being patient with this market. We will have a strong uptrend when this correction is over, but I think there will be more volatility and pain ahead, especially if people remain so complacent about the markets.

I’m not trying to scare anyone, I just take my work very seriously. I’ve kept a 90%-100% cash position for my clients since the beginning of the year because I’ve seen what corrections can do to people’s accounts. The market can be ruthless, especially if you don’t respect it and protect capital. Of course, if you have a longer-term horizon, stick with your game plan. Unfortunately, I think we will continue to see more volatility as the market creates more fear.

I can be reached at: jfahmy@zorcapital.com

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