4 Ways to Deal with the Market Pullback

High correlation is back. Today 96% of the S & P 500 stocks lost ground. Usually such high correlation correction assumes more immediate weakness ahead, so be careful blindly buying dips.

I am still under the assumption that this is a pullback within the realms of an existing uptrend and eventually it will turn out to be a buying opportunity. Below I list 4 ways to deal with the pullback. Which ones you are going to apply depends on your time frame of operation and risk affinity:

1) Watch for strength to give you a hint on potential future leaders. Stocks rising in a weak tape are usually under heavy accumulation for a long-term reason. Some examples from today: $PAY $SHFL

2) Pay attention to sector rotation and look to nibble stocks with high long-term relative strength, but short-term relative weakness – or in other words, stocks that have corrected over the past 2 weeks or so and are finally finding some buying interest. For example: semiconductors ($NANO $KLAC) and precious metals ($SLW $NGD) – for a mean-reversion, short-term trade.

3) I assume that you already have a wish list of stocks that you want to own on a pullback and did not want to chase. Market corrections are long-term investors’ best friends as they offer great brands on sale. My wish list includes: $COP $CMG $NKE $DDD.

4) Stay heavy in cash and wait for new long setups to show up and market averages to resume their upward trend, before you allocate more money on the long side. Good setups are like taxis. There is always another one just around the corner.

3 Signs of a Weakening Market

1. Small Caps ($IWM) have been severely underperforming over the past 3 weeks, essentially reflecting a new stage in the current uptrend – the so called flight to quality. This is not necessarily a bad sign, but a clear indication of decreasing risk appetite, which tends to feed on itself.

2. The major indexes ($SPY, $QQQ) had 3 distribution days in the past 13 days, which is certainly a reason for caution, but not for turning outright bearish yet.Tops in market averages are a process, not an event. Price/volume action gives enough clues before any major damage is caused.

3. There is a decent number of long setups that look like a Picasso – prior uptrend, followed by 5-20 days of tightening sideways price consolidation near major highs and yet very few of them actually break out. Those that do, are short-lived and quickly fade. Buyers don’t have the conviction to step in and push higher.

There are no reasons to turn outright bearish here. It seems that institutions are waiting for a pullback before allocating more capital. I assume that dips in high-growing names will be welcomed as buying opportunities, but in the meantime I raised cash this morning and pulled out of positions that haven’t performed according my expectations.

7 Things I Learned from Joe Fahmy’s Trading Big Winners Seminar

No matter how much experience you have in the stock market, you can always learn something new that will make you better and more profitable trader. Last Saturday, I drove to LA to attend Joe Fahmy’s Trading Big Winners seminar and I am happy to report that it was well worth it. Here are 7 things that I learned or was reminded of:

1) The names of the big winners change every few years, but their fundamental and technical characteristics stay the same. Stunning earnings and sales growth have been the common denominator of all long-term big market winners ever since the 1920s. This is still the case today.

2) Howard Lindzon also gave a short speech on his market approach. He highlighted three 3 important elements: Staying in the game; Having a Routine and understanding the catalyst behind the stock of interest. He is hunting for his winners on the all-time high list, but he is further pruning by focusing only on companies “I could be the head of marketing”. Howard also recommended to write down your market thoughts on a publicly visible platform like a blog or StockTwits as this will clarify your thought process and it will keep you accountable, mainly to yourself.

3) The market is moved by the big institutions. If a $10 billion fund wants to allocate 1% of its capital to 1 stock, we are talking $100 million – an investment that will certainly leave a trace for the experienced eye, especially if the float of the stock is relatively small; hence pay attention to stocks that are advancing on high volume.

4) You don’t have to be in the market all the time to achieve significant returns. The market is healthy only a few times a year and this is when you should get aggressive. One simple indicator to gauge for market health is the position of the Nasdaq Composite in relation to its 50dma. When the market is in a correction mode, Joe goes to cash and uses the time to either review old trades or just goes on vacation to take a mental break and prepare for the time when the market is healthy again.

5) Relative strength is among the most powerful stock selection technical indicators. Pay attention to stocks that are advancing and making major news highs while the general market is correcting. Also, if your growth stock is not appreciating while the general market is advancing, there is something wrong with it.

6) Taking great risk/reward trades is of utmost importance. Risking $2 to make $2 is not going to get you far.

7) Joe is looking for certain ranges in his setups to improve the probability of being right immediately.