Is a correction coming?
Traders overwhelming think so, said Joe Terranova of Virtus Investment Partners on Wednesday. After all, markets have rallied since September without a major pullback, giving pause to many who believe the best bull markets see healthy corrections before going higher. The S&P 500 and the Dow are each up more than 20 percent since Sept. 1.
Investor unease at the markets continued strength was evident at a recent Morgan Stanley investing conference, Terranova said. Most participants shared the view that a correction was inevitable.
So how should investors play the coming correction? The instinct may be to short the market — or at least individual stocks that look the most overvalued. Guy Adami of Drakon Capital, however, cautioned against taking such action.
In an SEC filing on Tuesday, Nelson Peltz revealed he is offering to buy Family Dollarfor $55 to $60 a share in cash. The news caused the stock to soar 30 percent in after-hours trading. Adami said that's just one reason people should stay away from short positions.
“Family Dollar shows how impossible it is to be short,” Adami said. “You go home short Family Dollar, an hour later it is up 30 percent, that is the risk you take.”
One reason shorts are dangerous in this market is there’s a favorable atmosphere for deals. Low interest rates coupled with record amounts of cash on corporate balance sheets has given many companies the ability to go shopping. Companies have more than $2 trillion in cash, short-term investments and other liquid assets, according to the Fed’s most recent ‘flow of funds’ report.
Another reason is growing confidence in the global recovery. According to a February survey by Bank of America/ Merill Lynch that was released on Tuesday, 58 percent of investors expect the world economy to strengthen this year — up 3 percentage points from the prior year. Corporate profits, investors said, would reflect the improving global economy, leading to a rise in equities.
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CNBC.com with wires.