Stocks are finding their footing on Wednesday, with the Dow Jones Industrial Average holding with a gain of more than 100 points as of this writing. Meanwhile, the CBOE Volatility Index is falling back to earth and investors are leaving their panic attack.
Following historic patterns, watch for a short-term rebound powered by short covering before a chaotic retest and possible violation of Monday’s low. The rapidity of the moves means there is a good opportunity for nimble traders to pad their profits during the churn. But only with one foot out the exit.
This isn’t a time for buy-and-hold position building. Not with major, secular headwinds building including inflation, higher interest rates popping the bond bubble and a new Federal Reserve chairman that seems set on holding to the rate hike path.
Here are five high-risk/high-reward ways to play the dead-cat bounce, featuring two biotech stocks and three ETFs to buy:
Dynavax Technologies Corporation (NASDAQ:DVAX) shares have been solidly in the midst of a multi-month consolidation range stuck between its 50-day and 200-day moving averages. The support looks solid, with shares shrugging off the recent market unpleasantness. Watch for a move to the November high near $24-a-share, which would be worth a gain of a third from here.
The company, which develops immunotherapy treatments, will next report results on Mar. 12, before the bell. Analysts are looking for a loss of 35-cents-per-share on revenues of 0.5 million. When the company last reported on Nov. 3, a loss of 38-cents-beat estimates by 17 cents on a 68.8% drop in revenues.
Geron Corporation (NASDAQ:GERN) shares have been acting like the broad market selloff didn’t even happen, up more than 40% from their early January low to close the gap from the late July selloff and returning to summertime trading levels. GERN is a biopharma company developing a treatment for hematologic myeloid malignancies.
The company will next report results on Feb. 28, after the close. Analysts are looking for a loss of 4-cents-per-share on revenues of 0.6 million. Watch for a possible run at the late 2015 highs near $5, which would be worth nearly a double from here.
Tied to the underlying Russell 2000 index, the Direxion Small Cap Bull 3X Shares (ETF) (NYSEARCA:TNA) provides 3x daily leveraged exposure to the small-cap index. The index fell near its 50-week moving average earlier this week for the first time since last August, setting up an oversold bounce that will likely see the index return to its recent record high.
At the least, watch for the RUT to return to its 50-day moving average near 1,550. A return to the high would be worth a 23% gain for the TNA from here; meanwhile, a return to the 50-day moving average would be worth a gain of more than 8% from here.
With rising inflation expectations being a primary motivator for the market selloff — spurred by Friday’s surprisingly strong payrolls report featuring a lift to average hourly wages — precious metals should enjoy a medium-term lift in the months to come. At least once the current selloff in gold, driven by a rebound in the U.S. dollar, fades away.
But not yet. Gold and gold mining stocks have been a persistent area of weakness in the market for years. And investors aren’t going to give up on their mentality anytime soon. So with the dollar making a powerful run higher — encouraged by pushback from trading partners in Asia and Europe about the Trump Administration’s weak dollar comments — the Direxion Shares Exchange Traded Fund Trust (NYSEARCA:DUST) should at the least make a return to its early December high for a gain of nearly 20% from here.
While the specter of higher interest rates has spooked investors, as the emotional shock of a possible end to the ultra-low rate era bites, the contrarian view is that stocks could enjoy a couple more months of strength with the bulls focusing on positive implications of higher long-term rates. Such as a lift to bank-sector profitability as net interest margins expand.
The Direxion Daily Financial Bull 3X Shares (NYSEARCA:FAS), which gives 3x bullish exposure to the daily moves of the financial sector, is consolidating below its 50-day moving average and looks ready for run back to prior highs near $80. Such a move would be worth a 15% gain from current levels.