Is this market correction for real? I certainly hope so and you should be hoping so as well. The VIX or Volatility indicator is picking up steam, hitting 18 last week. That number is still indicating bullish sentiment but it’s starting to tilt in the direction of bears.
It’s the bears that are putting fear into the market with some well placed sector attacks like the ones on the NASDAQ. You see, it’s a piling on effect that creates the type of carnage that we are seeing in individual sectors. The inside plan is always the same. Find a weak spot or two and then hammer away from all sides until it collapses.
The bears found two sectors ripe for picking this time around.
The first was the biotech sector which has been massacred in the past month since hitting new highs in March. Biotechs are easy to pick on. Many don’t make money and have drugs in trial stages. This allows for pie in the sky projections for “potential successes”. Nothing like lack of fundamentals to ruin a parade! Some biotechs saw share prices double and triple after announcing early phase results…not even approvals. And this left them vulnerable to the downdraft.
The second sector is social media with stocks like Twitter (TWTR), King (KING), Linked-In (LNKD), Zynga (ZNGA) and Facebook (FB) trading at crazy valuations. While companies like Facebook actually have reasons like market share and earnings growth to support a fairly loft valuation, others like Twitter cannot support valuations of 50 or 60 times sales. As I’ve written in these very pages, Twitter was overvalued when it came public and it remains so. It appears that investors are finally catching on as shares have dropped from the mid $70s to the mid $40s in less than a few months. Look out below as there is more room for this one to fall.
Enough about the losers. The market correction is a perfect opportunity to get into those stocks that are fundamentally sound but are getting whacked…or will get whacked if the correction continues.
The sectors that have the best potential moving forward are the financials and the energy sector. The energy sector is holding out the best right now and for good reason. Energy has become the focus of the world since the Russian incursion and annexation of Crimea. That has put a floor under oil prices. There is no end in sight to the issues surrounding the situation and that will keep energy prices higher for the foreseeable future. The oil and gas play that stands to benefit from the current situation is Norwegian giant Statoil (STO) which is the second largest supplier of energy to Europe behind Russia. It also pays a nice 4% plus dividend.
Currently Statoil is trading close to $28 per share after a nice spike in later winter. If the markets continue to correct, there will be an aberration between the price of energy stocks and the price of oil and gas. That’s an opportunity that you shouldn’t pass up. Statoil is a strong buy in the low to mid $20s.
The same type of scenario is playing out in the Financial sector with a disconnect occurring between prospects for financials and prices of the stocks. We’ll explore that in more detail in the next issue. For now, get your cash ready because if the Volatility Index continues higher and breaks 25, it could be an indication of a major correction ahead.
To your wealth,
Banker X.
