The first two days of 2020 trading have been marked with uncertainty. The news of China’s central bank cutting the reserve ratio and allowing more money to circulate in the economy pushed all major US indices (except the Russel 2000) to all-time highs. Today, the second day of 2020 trading and the markets are down nearly 1%, wiping almost all of yesterday’s gains off the table. Turbulence on the Iranian front is the primary catalyst for today’s sell-off.
The markets seem to be unsure of which direction to go. In December, the markets floated up on low volumes, ending the year at all-time highs. This gradually upward move doesn’t appear to have much support.
2019 is expected to finish up the year with negative earnings growth year-over-year, which has not been reflected in the stock market’s performance, with S&P 500 rallying 29% last year (its best year since 2013). Right now, the S&P 500 is trading at around 20x forward P/E, which is its most expensive level since the early 2000s. The stock market has been pricing in 2020 and 2021 growth that has not come to fruition. I believe that it may have overstepped its bounds.
Is the market due for a correction? Options are pointing to yes.
Market bears have been buying up March expiring puts for the markets most traded ETF, the SPDR S&P 500 ETF (SPY - Free Report) . As it stands, there are currently around 50% more puts expiring in March than calls. This means that most options traders are betting the stock market will fall in the next 2.5 months.
Stocks to Keep an Eye On
The correction I am anticipating will create a buying opportunity for some of my favorite stocks. Companies with savvy management teams, a sustainable product offering that can ride the trends of the future.
Nvidia (NVDA - Free Report) is my favorite chip-making company that I anticipate will take over the space in this next wave of tech. Nvidia is known for its GPU’s which have been primarily used for rendering images, but its speed and efficiency are making these semiconductors particularly useful in datacenters. Nvidia’s datacenter chips are being used in for deep learnings, and as its technology continues to progress, with this firm controlling almost 100% of the datacenter GPU market. I expect that NVDA chips will be a part of the first true AI.
Nvidia is also leveraging 5G with its anticipated cloud gaming platform.
Like cloud computing is the future of business data and analytics, cloud gaming is the future of gaming. Nvidia is making a big bet in this field with its cloud platform, GeForce NOW. This platform allows gamers to use their Macs or PCs for gaming anywhere with the high-speed, low-latency technology of Nvidia’s GPUs without needing Nvidia’s hardware locally.
Nvidia is teaming up with telecommunication providers “to expand and improve the cloud gaming experience globally.” Getting in front of the 5G wave to be prepared with a turnkey solution once 5G is widely available.
These shares have seen a roughly 75% run-up over the last 52-weeks. I presume that NVDA would see a sizable fall in the case of a market correction, considering it is sporting a beta north of 2. I like this stock at any price below $200.
The streaming devices leader, Roku (ROKU - Free Report) , is another stock that I would love to get a hold of at the right price. These shares are trading at a rich double-digit forward P/S, and I would like to get into this stock if this valuation would drop into the single digits. ROKU is a highly volatile stock and would undoubtedly take a hit with the broader market. I would look to buy this stock as it approaches $100 or hits its 200-day moving average, which currently sits at around $110.
Roku is on the right side of the streaming war as more competition in the space only adds to its product offering. Roku has become almost synonymous with cord-cutting. According to Roku’s most recent shareholders’ letter, “roughly 50% of U.S. cord cutters are Roku customers, and around 56 million households in total will have canceled cable or satellite TV subscriptions by 2023.” Its devices range from a $30 4K plug-ins to very affordable TV options, partnering with top brands.
The market is expensive right now, and traders are starting to see it. March puts are looking increasingly attractive as options traders pile on. This market has floated up in December and all it needs is a little prick to deflate back to more practical levels.
As an investor, I would be hesitant to put any substantial long position on until a slight correction is seen. I would like to see the S&P 500 forward P/E multiple drop down to the mid-to-upper teens before I feel safe about putting more into the market, although positive trade news could extend this rally.
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