Adam: To be clear, we are still bullish on the market. In the short term, the market is extended and simply pausing to digest its recent and robust rally. The intermediate and long term action remains very healthy.
Jim: And where do you see the best opportunities now? Some people are saying there’s not many bargains around?
Adam: Final thought on the market: Too Obvious and Round Numbers – 1,800 & 16k:Earlier this week, the S&P 500 and the DJIA hit new record highs and topped 1,800 and 16k for the first time respectively. This “news” is already made headlines on Monday. Almost immediately, I received tons of questions from people who never ask me about the market. They all want to know if now is a good time to “invest?” This simply means- be careful up here- especially after a big move.
Adam: The best opportunities remain in the areas of the market that have been working: Financials, Transports, Healthcare, and Tech, to name a few. It is very important to note that in a strong bull market (like we are currently experiencing) you should look to buy weakness, not just strength. This helps you build a cushion and get in when other people are “scared” and want out…then when the market rallies you have a nice cushion in your portfolio, and other people are getting chopped around.
Jim: So the best strategy now is to wait for a general pullback and buy on that weakness?
Adam: For larger commitments yes, but there are always new opportunities in the market for investors to take advantage of. If you only wait for pullbacks to buy you might miss them. There is a chance that pullbacks going forward will be very shallow and could only last a few days (similar to what we saw Mon-Wed) this week. In case you don’t know, the three day decline from M-W was the longest consecutive decline for the S&P 500 in 8 weeks! Think about that for a second, the S&P 500 hasn’t fallen for 3 straight days in 8 weeks…If that doesn’t clearly illustrate how strong this market is right now, Not sure anything will. Another approach is to be selective and look for new stocks to break out of sound bases (or move above prior chart highs)….with a close exit below the prior chart high (to limit your loss if wrong). A third approach is for value investors to buy undervalued stocks. Billionaire investor, Carl Icahn has done an excellent job of this recently… His favorite undervalued stock right now is Apple. Apple is currently sitting on resistance or prior chart highs… and serves as a good example of a stock that is a hybrid of two approaches… its prior chart highs are near 510-513. The stock is currently trading near 515. In fact, the low this week (so far) is 514 which is not a mistake.
Jim: OK can you explain that a bit more for novice readers?
Adam: Sure Apple is currently trading just above $515. It is very important for investors of all size to look at both sides of the equation- the risk and the reward. Most people buy without paying attention or quantifying their risk (where they are going to exit if wrong). Ideally, everything we do- we look for favorable risk/reward parameters. That said, if someone buys AAPL near $515 they can clearly exit below $510. This means they are risking $5/share for the potential to make almost $200, if not more. One year ago, Apple was trading over $700/share. That is an example of a favorable risk/reward scenario. Furthermore, you are only risking ~1% on the idea because $5 is ~1% of $515
Jim: OK thanks. What are your thoughts on Facebook currently?
Jim Facebook is in a very similar situation where it is offering a great risk/reward ratio as it trades just above support (in this case, prior chart lows near $45.26)…Currently, FB is trading near $47 and buyers show up and defend support every time it trades near $45.26-46.25 area. So if you are looking for a new stock to add to your portfolio, and you want to buy FB now would be a low risk time to buy. Because following that logic you would exit below $45.26 if support is breached. That means you would risk about $2 on a $47 stock or about 4.2%… Only a few weeks ago, FB was trading near $55. If the stock just gets back to its Oct high you stand to make $8 or nearly 20%! In Sum: Risk ~4% Potential Reward ~20%
Jim: That’s great, thanks so much Adam.