The Stock market rally this year has been largely driven by a handful of high Tech Stocks. They rally and pause and pundits proclaim their demise. And then they rally again! The problem for a trader is how to trade tech stocks that cannot keep going up forever but certainly have not yet run out of steam. Reuters writes that Wall Street hits record highs on strong technology.
U.S. stocks rose on Monday, with the S&P 500 and the Dow hitting record highs with growth sectors such as technology in favor again as investors appeared to regain confidence in the economy after upbeat comments from Federal Reserve officials.
Nasdaq’s biotechnology index .NBI rose 2.5 percent in its biggest one-day gain since February while the S&P’s healthcare index .SPXHC had a record-high close.
The S&P technology sector .SPLRCT finished up 1.7 percent after its second straight weekly decline, which was triggered by fears of stretched valuations. Tech stocks have led the S&P 500’s 9.6 percent rally this year.
“Investors were temporarily chased from the space but many companies in the sector offer growth which is difficult to find in the market as a whole,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.
The continued rise of tech stocks is based on the fact that they are growing and on the fact that many other sectors are not. But what happens when growth slows or the economy disappoints?
US Economy Going Forward
There is no economic surge forecast for the second half of the year according to CNBC and this should worry anyone who is too heavily investing in high tech, overpriced growth stocks.
Investors betting on a strong pickup in economic growth might want to consider a new forecast hitting Wall Street on Monday.
The New York Federal Reserve now expects U.S. economic growth at an annualized rate of 1.9 percent for the second quarter, down from a 2.3 percent forecast. The bank also expects annualized growth of 1.5 percent in the third quarter, down from 1.8 percent.
The U.S. economy grew at a dismal annualized rate of 1.2 percent in the first quarter.
The Fed just raised interest rates and plans to unwind its $4.5 Trillion stash of bonds by cashing out and putting the money back in the US Treasury. This huge negative cash flow will affect the economy as well. The Fed expects to raise rates once more this year but if they stick to their plan to only follow the data that rate bump may not happen. How to trade tech stocks in this environment is to do so cautiously. One approach for those who have experienced great gains in the run up of tech would be in trading stock options. Buy put options on stocks that may already be overpriced. This amounts to insurance against a price collapse in the event of a market correction. Because you are the options buyer you only need to exercise the option in the event of a price drop. And if the price does fall you can still sell at the contract price.
How to Trade Tech Stocks PPT
