REASON #1

As many of you know, I use the price action of leading stocks to help me determine the overall health of the market. Everything else is just noise. When the market corrected in June, I thought we could be heading into a deeper correction…but something interesting happened. As I did my nightly screening work in June, I noticed that many leading stocks held up EXTREMELY well. And it wasn’t just 3 or 4 stocks, it was about 30-40 stocks spread across many different sectors.

I’m not going to get into all the stocks (mainly because I want to encourage traders to do their own work and find the stocks that fit their own criteria), but I will give two examples: Tesla (Symbol: $TSLA) made an incredible move from $40 to $115. In June, when the market began to correct, the stock BARELY CAME DOWN!!! This is a high beta, high growth stock that in normal corrections should have pulled back to at least $80, especially given its enormous move over the previous 6 weeks. The fact that it barely budged is a great sign that investors still have a “risk for appetite” in the stock market. The other 30-40 stocks that held up well were also “higher growth, higher risk, higher PE” type of stocks, telling me that this rally is not over yet, it just needs time to digest some gains.

The second example is $IWC. This is an ETF that tracks the Russell Microcap Index. This ETF MADE A NEW HIGH ON TUESDAY (7/2/13)!!! My point is similar to Tesla. If investors were looking to reduce their “risk” assets, they would be dumping their higher growth, higher multiple stocks, and moving into “safer” investment vehicles. The fact that many high growth and smaller-cap stocks held up so well is an overall positive sign for the market.

REASON #2

I have talked to many investment managers who are underperforming the averages this year. They all have a similar story: They came into the year cautious due to the Fiscal Cliff, they fell behind 3% right off the bat because of the big gap on Jan 2, they waited for a pullback that never came, and they are DYING for this market to come down so that their performance doesn’t look so bad.

My feeling is the market won’t let them off the hook so easily. In other words, if the market starts to approach new highs over the next 3-6 weeks, these managers will be FORCED to put money to work so their performance doesn’t look bad. They face potential “career risk” if the market finishes up 20-25% (as David Tepper predicted at the end of 2012) and they’re only up 3-5%.

3 FINAL COMMENTS:

1) I don’t think we are out of the woods yet, but I also don’t think this current correction will turn into a severe pullback as I thought last month. I am keeping an open mind that we could see one more leg down over the near-term, but if that happens, I will be focusing on the long side and the strong companies that have significant upside over the next 6-12 months.

2) Although I moved to 100% cash the week of June 17th, I have since put money back to work. Going forward, it doesn’t make sense to mention my investment levels on this blog. Not because I care about being wrong, but because I am constantly adapting to what the market is telling me and my investment levels vary too frequently to update. Also, keep in mind that moving to cash is mainly for active traders and not for everyone.

3) If I am right about the market moving to new highs later this year, stock selection will be VERY important. If you mostly trade ETFs that’s fine, but those are all averages. I’m not in this to produce an “average” return. I think you can significantly outperform over the next 6 months if you are disciplined and effectively trade the right stocks. This style isn’t for everyone, but if you are willing to put in the time and do your homework, you will be pleasantly rewarded if the market cooperates. Good luck trading!

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

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