The stock market is selling off sharply again today, as weak economic data from China and disappointing earnings are weighing on investor sentiment. Concerns about the FED announcing additional tapering at their Jan 28-29 meeting are also rattling investors, as the WSJ is projecting an additional $10B in tapering.

In the first edition of the Technology Speculator newsletter this month, I highlighted how the Nasdaq was trading near the top end of its trend channel and was due for a correction to test the bottom end of this channel. The red rectangles in the chart below show the potential downside in order for the Nasdaq to return to the bottom of the long-term trend channel and test support. It represents an additional decline of roughly 3.5% to 4%.

NASDAQ

This type of pullback to test support has occurred fairly regularly in 2-3 months intervals over the past few years. It is perfectly normal and quite healthy for any bull market to have periodic corrections and consolidations in order for profit taking and allow the bull to “rest its legs” for a brief period. Yet, we had not seen a correction in nearly 4 months, so the pullback that started yesterday should not have come as a surprise to astute investors.

In fact, the technical signals pointing to this pullback were the reason that I did not start the model portfolio will full allocation and instead held 75% in cash.

Over the course of the next few weeks, we will be presented with opportunities to buy many of the technology stocks on our target list at sizable discounts to their price levels during the first few weeks of the year.

Timing our entry prices will be the difficult part, as I believe there is the outside chance that the stock market sell off accelerates and the Nasdaq tests the 200-day moving average around 3,700.

So, while it is not quite yet time to buy the dip in tech stocks, I will likely edge into new positions slowly on any drop towards Nasdaq 4000, with the following stocks on my radar:

CREE, OLED, ADEP, SCTY (others in newsletter)

I believe these companies have huge potential over the next few years and could see their share prices advance significantly. However, they were definitely looking frothy lately and had gotten ahead of themselves, so it is nice to see a pullback.

Since I am anticipating additional declines in the stock market next week, I may look to hedge our portfolio via an inverse ETF. A fund such as the ProShares UltraShort QQQ (QID) would be an obvious choice, but emerging markets are getting hit particularly hard with this decline. Therefore, I believe we can expect greater gains via the Direxion Daily Emr Mkts Bear 3x (EDZ) and I will buy shares near the close today. I will buy enough shares to represent 7% of the model portfolio and will plan to hold for no longer than a week or two, as we exit this short position and go long once again.

Please keep in mind that inverse/leveraged ETFs such as EDZ suffer from long-term decay. I do not plan to hold this ETF for more than a few weeks, so it may not be a suitable trade for buy-and-hold investors. There is also increased risk with this ETF due to its leveraged nature. If you have a margin account and are comfortable shorting stocks or trading options, you may look for alternative ways to get downside protection. This could be via shorting a long ETF fund, buying puts against a long fund or selling calls.

Happy Friday and have a great weekend ahead!

Cheers,

Jason Hamlin
Editor-in-Chief, Technology Speculator