Market  is  in  Correction

It was a very ugly day in the market on  Monday Feb 5th.  The wave of selling started when the market opened in Japan, while the fans in Philadelphia were celebrating the victory of their home team.  That celebration was short lived.  It's 8.30 pm on Monday night here as I am writing this post and the Japanese Nikkei is down  - 4.75%  already in the first hour of trading.  I often make the remark when I give talks to the investment groups

"When the US stock market sneezes, the rest of the world catches a cold"   

All the 3 major indexes - $DJI, $SPY and $QQQ gapped down when the market opened and plummeted past below the  50 day sma(simple moving average) by the close of the day.  Currently they are all hovering at 100 day sma.  This sort of move usually takes a couple of days but this time around it happened within a day.  Trading volume on the $DJI was the highest we have witnessed in the last 9 years.  All the gains we had made in January was given up within a couple of days this month.  Some of the leading Growth Stocks did even worse.   

Timing  the  Market

I posted a blog on Saturday Feb 3rd (I have never posted a blog on Saturday) because I was concerned from what I saw on the charts of the major indexes and all the major sectors of US market.  A correction of  -5%  to  10%   was having a higher probability of occurrence.  $VIX  would certainly spike in the process as well.  All the gains that we had made in the 3 major indexes in January was given up within 3 days in February.  This sort of loss in a portfolio had to be anticipated.  $VIX spiking  +50%  was also a higher probability.  As a matter of fact,  $VIX did spike to  +115%  today instead.  For those followers and readers of my post that protected their portfolio with trading options on $VIX, probably profited handsomely today. 

One of the tools I utilize is the  "Distribution Days"  count of the $SPY  and the  $NASDAQ.   2 weeks ago we had only  3 distribution days.  Today it has spiked to  11 and they have piled up in a cluster of a couple of days.  That is a signal and a sign from the institutions that they are bailing out.  It clearly shows up as a spike in the volume of trading that results in indexes moving lower.  Another tool that I utilize is the $VIX.  It had been creeping higher as well from  $11.08  to  $14.79  within the first 2 days of last week.  The 3 indexes had already started drifting lower after trading between 10 to 14 days at the upper bollinger bands.  It was getting into a situation where the indexes would snap back to the mean.  It most certainly did that within the last 2 days.      

Lessons  Learnt  This  Week 

If you suffered a severe draw downs to your portfolio this week, there are some important lessons to take away from what we have experienced in the market.  The last time we had a trading volume in the $DJI like the one we saw on Monday was in March 2008.  Within days after that, the market took a bullish turn with a follow thru day in mid March of 2008.  Lots of stocks began breaking out and new Growth Stock leaders appeared that doubled over the next year.  These are some of the lessons to take away this week:

• Stay engaged with the market consistently and always develop a Stock Watch List every week.
• Lots of holidays and celebrations occur throughout the year but be disciplined to have your finger on the pulse of the market every day.  Have a routine.
• Always prepare a detailed Trade Plan for any position you take. Review the stock charts and make appropriate notations of reasons why you chose to take that position.  This comes handy when you do your post mortem of all your trades.
• Plan an appropriate trailing stop once the stock position becomes profitable.  Be in tune and in step with the market conditions.  Adjust the trailing stops with changing market conditions.
• Stay disciplined with your Buy rules and Sell rules.

STAY  IN  CASH  NOW

Happy Trading!

Amin