Much was made last week of Janet Yellen’s claims that sectors like social media and biotech are “stretched.” That’s all well and good but at the end of the day (and with all due respect) Yellen is a macro economist and not someone we’re prone to take trades from.
Well wouldn’t you know it, a real live market watcher says Yellen was right! “Social media, biotechnology...there you’ve got valuations which are very stretched,” says Hugh Johnson of HJ Advisors. “I don’t think stretched is a strong enough word. For the market overall though I think the market’s modestly overvalued.”
OK, so Yellen was dead on according to Johnson. Well how then is he playing it? “Common sense alone says we’re gonna have some sort of a pullback in stock prices.” Johnson says citing a huge up year in 2013 and a solid start in 2014. He says the correction everyone is talking about is indeed coming. Hi hopes are that it will be enough to bring those broad yet modest over valuations back into line creating a good buying opportunity.
Still he cautions all to remember that we are still in a bull market and so dumping out of stocks isn’t a good idea while we wait for the aforementioned correction. Instead, he says, build some defense in sectors like healthcare.
Since Johnson is careful to remember that defense or not we’re still in a bull market he also likes names in technology, energy and materials, typically not defensive but more prosperous in bullish times.
However you build your portfolio ahead of this looming, albeit normal and needed correction, Johnson reminds us to “use that [correction] as an opportunity to add to stocks, add to your portfolio.”