Are chances of a major correction growing?
Two widely followed market strategists are both concerned that the market is over-extended.
Richard Bernstein who called the tech bubble and veteran trader Gary Kaminksy are both ringing bells of caution.
Bernstein’s Warning Signs
Bernstein has spotted three trends emerging that lead him to believe the next leg may be lower. They follow:
1. U.S. Dollar Breaks Out
Although a stronger dollar goes hand-in-hand with recovery it’s also bearish for commodities, making them more expensive for buyers holding other currencies.
And much like strategic investor Dennis Gartman said on the Halftime Report, we’re seeing a watershed shift in favor of the dollar and as a result there will be further pressure on commodities prices.
2. Rising Rates
The Fed has indicated that it intends to keep rates low for an extended period, however the Bank of China is tightening and that effectively reduces liquidity around the world.
3. Oil Prices Choke Consumer
Gas prices present a double whammy. Not only do lower prices at the pump have a real economic impact, but they also have a psychological impact making people feel more at ease opening their wallet. Bernstein says. "that's the critical thing." Energy spending as a percentage of income is creeping back to troublesome levels. If oil prices rise more quickly than incomes, recovery could be cut off.
"If you want to have a correction these type of things will cause one," Bernstein says. "And the only places to hide out are the dollar and Treasurys."
Market Is Exhausted, says Kaminsky
Meanwhile veteran trader Gary Kaminsky makes a similar argument using the price action in JPMorgan as his “market tell.’
He says JPM action shows 'how stocks that are over-owned and give-off even a whiff of caution can get sold pretty quickly.'
Because the underlying tone in the market right now is skittish, he’s nervous about Apple and Amazon and tech in general because he says, "it's all over-owned."
But rather than expose yourself to company specific risks, Kaminsky says play it with a short position in QQQQ. “I don’t want company specific risk; being short the Q’s gives you that visibility on the downside,” he explains.
And for what it's worth Kaminsky says he’d turn bullish if he saw upward earnings revisions, but until then, he’s betting that the tech trade is exhausted.
What do you think? We want to know!
Guy Adami is bearish on stocks for three other reasons. Click here to find out what's got him saying "we're going lower."
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Trader disclosure: On January 21st, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Finerman's Firm Is Short (IJR), (MDY), (SPY), (IWM), (USO), (UNG); Finerman Owns (AAPL); Finerman's Firm Owns (ACL), (CLX), (MSFT), (TGT), (WMT); Finerman's Firm And Finerman Own (WFC) Preferred; Finerman's Firm Owns (BAC), (BAC) Leaps; Finerman Owns (BAC), (BAC) Preferred; Finerman's Firm And Finerman Own (CVS); Finerman's Firm And Finerman Own (GOOG); Najarian Owns (CLF) Call Spread; Najarian Owns (HUM) Call Spread; Najarian Owns (INTC) Calls; Najarian Owns (MS); Najarian Owns (PFE); Najarian Owns (CIEN) Calls; Najarian Owns (STX) Call Spread; Najarian Owns (MRVL), Is Short (MRVL) Calls; Najarian Owned (INTC) Calls Today; Terranova Is Short (CMA), (ICE), (ESS), (JCI), (CAL), (AGU); Terranova Owns (BAC), (JPM), (XOM), (FTO), (FCX), (EMC), (AAPL), (DELL), (MSFT), (QCOM); Terranova Owns (XHB) March Puts; Terranova Owns (POT) February Puts
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