Corrections Can Happen Over Time Instead of Price

Before you jump out of your chair, I am well aware that calling for a correction over the past few years has been a futile effort. The market has been resilient, mainly to do with a recovering economy and the globally coordinated effort to keep rates low.

1) We could see a correction through time instead of through price. For example, the Russell 2000 had a huge gain of +37% in 2013 and it has mostly moved sideways for the past 18 months. After a 40+% move over the past 2 years, the S&P 500 could possibly do the same thing and move sideways to frustrate both the bulls and the bears.

2) Due to slowing economic growth and/or an unexpected spike in interest rates, we could see a 10+% correction this summer. If conditions worsen, expect the US Federal Reserve to announce some form of additional quantitative easing later this year. Ideally, I would love to see a 2010 scenario where the market corrects during the summer and allows many stocks to reset their technical bases. Right now, I am having trouble finding quality long ideas because most growth stocks are extended from proper buy points.

3) If $AAPL pulls back this summer, it will destroy investor morale as it is the most loved stock I have ever seen in my 19 years of trading (even more than Cisco in the 1990ā€™s). If it corrects down to the $110-115 range, everyone I know says theyā€™ll ā€œbuy the sh** out of itā€ and that mentality scares me. Itā€™s as if the stock will go up forever and never go down. Iā€™m certainly not hating on the greatest company of our lifetime, Iā€™m simply reminding people not to marry stocks because eventually, they ALL disappoint.

If I am right about a coming correction, many traders will be in for a surprise, especially the new ones who are not used to being defensive. We are all convinced to buy the dip because it has worked so many times but remember that the market is a master manipulator. It convinces us of a pattern over and over, and just when weā€™re convinced, it changes.

If I am wrong, I will simply make the proper adjustments. Keep in mind that I manage money for clients and itā€™s much different than trading for yourself. My number one priority is to protect their capital, which is why I moved us to a larger than normal cash position two weeks ago. I have also taken some short positions to hedge our long holdings. If conditions improve, I can always adjust our investment levels accordingly. Good luck trading!

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

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***

Joseph Fahmy is the managing director at Zor Capital, LLC, a New York based investment management firm. Joe has over 18 years of trading experience during which he developed his investment strategy.Ā He worked in New York City for a boutique research firm where heĀ gained extensive knowledge of the technical analysis of stocks, market forecasting, and risk management.
Joe completed his undergraduate work at Tufts University, receiving a B.A. in Economics and Religion in 1995. Outside of trading, Joe enjoys playing the drums, travel, and sports.

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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