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My indicators are giving strong bearish readings for the fifth week in a row now. Until Thursday’s rally, we had seen the market start to cascade lower over the past week or so, but there’s the potential for stocks to continue their decline again once the exuberance over the tax-reform bill getting through the House yesterday wears off.
If that bill is rejected by the Senate, however, it’s going to be a big negative for the market, and I wouldn’t be surprised to see a mild correction of 3% or more in that situation.
Over the last 20 months, the Dow Jones has increased about 40%, which translates to roughly 2% per month. This is very excessive and, while November has been relatively bearish, I think this continual grind higher is a warning sign that we may start to see some cracks in the rally.
As a result of the enormous appreciation we’ve witnessed, some of the top economists are saying that the market is overpriced. Robert Shiller, one of the economists who I respect a lot, stated this week that he is concerned that both individual and institutional investors have lost confidence in the valuation of the market.
I agree, and valuations are certainly stretched. So, today I’m recommending a bearish trade: puts on Coherus Biosciences Inc (NASDAQ:CHRS).
While generally speaking I like biotech, in a weakening market it’s a good idea to trade neglected and unloved names to the downside.
Buy to open the CHRS Jan (2018) 7.50 Put (CHRS180119P00007500) at $0.45 or lower.
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