Posted April 29, 2014 9:45
Over the last few weeks we have seen quite a sell-off in the momentum names. However, the market did see a strong bounce over the last 2 weeks, up until Friday. I think that we are at the beginning of a two-month correction. Over the next few weeks, I think that we will see “Sell in May and Go Away”. Seasonality, a mid-year presidential cycle year points to big losses in May and June. A potentially troubling sign is that the NASDAQ has formed a bearish Head and Shoulders topping pattern. My bearish view on the market is only temporary as I think that the market will have a strong Q4 rally, due to seasonality trends.
The way I would play the correction is by buying puts in the NASDAQ and individual momentum names. The fact that the NASDAQ could not break above its 200-day moving average leads me to believe that it may test its 200-day moving average, which is around 4% lower. Another way to place a bearish bet, albeit a more conservative bet, is to sell a call spread. By selling a call spread you would need the price of the stock/index to close below both legs of the trade in order to collect all the premium.
For Long Term Investors:
I believe that the market will continue to go up over the next year or so, even though it may be a lot more choppy than it has been over the last year. It is smart to own stocks if you have a medium to long-term horizon. Something to be aware of is that the market usually has a 20% correction once every three years; we had one in 2008 and 2011, so one could say that it is possible that we have one in 2014. Therefore, I think the smartest thing to do is wait for at least a 10% correction in the S&P 500 before buying stocks for the long-term. I am bullish on the Biotechs long term. Many of the Large Cap Biotechs such as Celgene and Gilead have phenomenal earnings and seem to be very well positioned for the future. I am also bullish on Bank of America long term since I think that with the rising rate environment, BAC is best positioned to capitalize. Lastly, I am bullish on Facebook. I think that the strong earnings growth and the relative cheapness compared to other stocks in its sector lets will lead it to print $100 over the next couple years.