My friend Joe Fahmy, who runs a momentum strategy out of Boston (Zenith Asset Management), sent me his latest note to investors this week. Fahmy went to cash around the same time as my trading accounts did (late July-early August) although we each have different inputs we watch to make those types of decisions. In Joe’s note, he lays out seven things to be aware of which I’ve reprinted below…Enjoy! – Josh
1) I believe the market is healthy 2 to 3 times a year. I will always do my
best to expose your portfolio to the strongest stocks I can find during
market uptrends. When I see warning signs, my number one goal is to play
defense and protect your portfolio.
2) When the market is in a downtrend, I go to cash for one simple reason: 4
out of 5 stocks follow the general direction of the market. In other words,
I don’t care how good the company is, when the market is under selling
pressure, the majority of stocks get hit.
3) I realize there are many different investment styles, but for your
actively managed trading account, I find this philosophy to work best in
order to preserve capital and achieve strong compounded returns over time. I
try my best to keep your account near its highs because a -10% decline takes
an +11% gain to recover the losses. That scenario is at least manageable,
however, if we were to ride stocks down -25%, it would take a +33% gain to
recoup the losses, a much more difficult task.
4) Currently, I’m not sure how long this correction will last…NO ONE KNOWS!
The average Bull Market lasts 16-24 months, and we just had one from March
2009-June 2011. The average Bear Market can last 3-9 months. I’m guessing we
could have a strong rally sometime in the 4th quarter, especially since 9 of
the last 11 4th quarters have seen strong uptrends. I’m not too worried
about predictions because they’re all useless in my opinion. Instead, I will
focus on the day-to-day price action of the market and slowly expose your
portfolio as conditions improve.
5) I will occasionally take small positions when I see potential trading
opportunities. For now, I plan to keep us mostly in cash.
6) Another reason I go to cash is to protect confidence. Too many times in
the past, I would do well during market uptrends, only to give back a
majority of my gains during corrective markets (such as the one we are in
now). By protecting capital AND confidence, I will be ready to take
advantage of the new uptrend when I see healthier signs.
7) I used to get discouraged during market downtrends, but now I embrace
them. Why? Because when the correction is over, I am confident that we will
identify the new “leading” stocks that have potential to increase rapidly in
price. Until then, patience is very important.
A lot of good stuff in there. Joe trained under Mark Minervini and is a highly-disciplined voice in the community. If you’re reading him, see the links below.