Weekly Market Assessment
Momentum Meltdown Part II. This week after setting new highs, we are again seeing the high momentum stocks sell off. These extremely high P/E (Price to Earnings) ratio stocks that far exceed their peers are bringing down the market yet again. Just this week, NetFlix is down 6%, Telsa -10%, Twitter -10% and Zillow -8%. These similar events not long ago triggered what many thought was the beginning phase of a market correction, which happened to only give those willing, a chance to pick up these high momentum stocks at a deep discount. Is this an opportunity to grab these high beta names, which look to be correcting without any industry or company news, or a time to wait until valuations become more reasonable to justify such high prices and trade in relationship to their peers?
Looking to the Russell 2000, which is a conglomerate of 2000 U.S. based small cap companies, have also seen a sharp decline this week as well, but why? Last week we got a great jobs report and a reduction in the unemployment rate. So, why would this index be down close to 5% this week when the index is made up of only U.S. companies? Was the jobs report baked into the market as old news? Also, why does the yield on the 10 Year Treasury Bond continue to fall back down to ~2.5% when people should be fleeing this market in search for a better yield in equities? As always, there remains so many questions however, there comes a time to stop looking at the short term concerns and capitalize on corrections that occur that cant be explained.
Making the Watchlist: Below are the stocks that I will be looking at over the coming months. I will provide the the current stock price and why I am watching them. I will comment on them as I continue to keep an eye on them. You will be able to see and follow their growth and/or decline. Chart links may be attached.
Allergan (AGN) $166.43- operates as a multi-specialty health care company primarily in the United States, Europe, Latin America, and the Asia Pacific. The company discovers, develops, and commercializes pharmaceutical, biological, medical device, and over-the-counter products for the ophthalmic, neurological, medical aesthetics, medical dermatology, breast aesthetics, urological, and other specialty markets. AGN is in the middle of a hostile takeover by Valeant and Pershing Square Capital (Bill Ackman). The acquirer is looking for a special shareholders meeting to vote and remove 6 board members and be replaced by 6 new members chosen by Pershing and Valeant to allow the acquisition to take place. With or without the acquisition, AGN has $14 billion in free cash flow and is growing its earning by double digits each year.
From the Trading Floor to the Option Pit: A quick look at whats on the trading desk:
S&P 500 (SPX) -I bought straight weekly "PUTS" at 1965 to protect my long positions.
Allergan (AGN)- After Valeant and Pershing Square increased their bid to buyout AGN, I bought common shares at $168.50.