I
am hearing and reading more and more about how the stock market is headed for a
correction, especially after days like we had Friday, with the S&P down
1.26% and the Nasdaq getting pounded down 2.56%. But the fact of the matter is that we have had weeks like we
just had, almost continuously now for a few months. The market will either slowly fall for 3 or 4 days, followed
by a 1 or 2 day monster rally, or vice-a-versa. What is concerning so many people is that the stocks that
have led the rally over the last 18 months are now the stocks headed into bear
market territory (Tesla, Facebook, Amazon, Netflix, Biogen, and Celgene). Other former leaders like Gilead
Sciences, Google, Boeing, Visa, and Mastercard are all in correction territory
(a drop of 10% from all-time highs), with seemingly no end in sight. The Nasdaq 100, which contains mostly
biotech and technology names like the ones previously mentioned is now down
5.3% from all-time highs but only down 1.6% YTD. Comparatively, the S&P is up 1% this year even after
selling off sharply on Friday.
So
how can we navigate this market with all the naysayers out there calling for a
correction? First, we need to look
at what’s actually going on in the broader market. While all the leaders, and I mean all of them, from the last
1.5 years of this bull market are in complete freefall, other stocks are
actually trading the exact opposite and are hitting new highs almost on a daily
basis. The one thing that the big
momentum names have in common is that they are all trading at high P/Es,
whether relative to their historical average, the S&P as a whole, or their
individual sectors, they are expensive, nonetheless. Momentum names tend to overshoot on the upside as they did,
and now they are overshooting on the downside, which is leading to some nice
buying opportunities as long as you are investing for the long haul. The Nasdaq 100 (NDX) and all of these
stocks have really ugly charts, and could have some more downside. The NDX fell
below two important resistance levels on Friday’s sell-off, but is still
trading above the 78.6% Fibonacci retracement of 3522.75. I would expect the market to test that
level on Monday, and if it holds throughout the week, we could see a lot of
these names begin to rally back.
As long as the market holds that level, I recommend buying some of your
positions in these biotech and tech names. These types of stocks move very fast in both directions and
can all easily rally 5-10% in a week, so you want to be part of that when it
happens. Not a single one of these
stocks have had any fundamental changes that warrant a rapid 10-20% drop, which
is why I am not telling you to avoid these names at all costs. Companies like Gilead, Biogen, Tesla,
Amazon, Boeing and Google have incredible long-term upside potential, but
unfortunately are just the stocks getting picked on right now.
The
biggest reason I don’t see anything close to a correction coming is because
this is not a broad market sell-off.
This sell-off is only occurring to the high momentum names with high
P/Es. What IS working in this
market is the value stocks, paying good dividends and trading on the
cheap. Stocks like Microsoft,
Qualcomm, Honeywell, Union Pacific, CVS Caremark, Caterpillar, Merk, Pfizer,
etc…are all making new highs. Bank
stocks like JPMorgan and Wells Fargo (reporting earnings on Friday), and previously
hated stocks like Alcoa (reporting earnings Tuesday) and IBM are also
rallying. The big transfer of
ownership from high-flying momentum names to slow moving value stocks has been
going on for the last two weeks, and as long as money doesn’t come out of these
value stocks to move to the sidelines, the stock market will continue to power
higher. If you don’t own any of
these stocks, I would recommend buying some now because it isn’t too late. I like healthcare stocks like Pfizer
and CVS and, which pay good dividends and are continuing to perform well and
industrial stocks like Honeywell and Union Pacific the most.
Lastly,
I want to give a quick stock recommendation that I, myself, am taking a look
at, which is General Motors (GM).
I’m sure you are all aware of the recall problems that they are going
through right now, but that is precisely why I am looking at buying the
stock. This reminds me very much
of the BP oil spill and more recently the Anadarko Petroleum lawsuit. Both stocks got hammered after their
negative news, and both stocks recovered very quickly and are now trading at or
near all-time highs. I don’t see a
lot more negative news coming out that isn’t already in the stocks price and I
like how new CEO (who wasn’t in charge when these problems existed), Mary
Barra, has handled the situation.
Every automaker is going to have recalls, so what is going to determine
how the company does, is how management handles the recall, and Mary Barra has
done a good job of dealing with Congress and making internal changes. GM just recently released March auto
sales that increased 4.1% YoY led by Buick, which beat out Ford’s increase of
3.3%. General Motor’s reputation
hasn’t taken as big of a hit as it’s stock price would indicate so buying GM
are this level will be just another great long-term holding and good way to
play the economic recovery.
My current positions: Long
Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation
(SPWR), Starbucks (SBUX), Visa (V), Macy’s (M), Southwest Airlines (LUV),
Boeing (BA), Disney (DIS), Control4 (CTRL), long COPPER, long WHEAT.
Jeff Lewison
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