Life as an options trader can be unforgiving.
While professional stock derivatives trader John Salama anticipated the key technical levels for the market last fall, including nailing the exact downside target for the SPDR S&P 500 ETF, he wasn't rewarded for it because his call was premature by just a few weeks.
"I was a month early before," Salama said in a recent interview with Business Insider. "It's funny — in trading, being early is wrong."
Salama was no stranger to tough breaks in 2023. The trader said he finished the year in the red, though his portfolio is off to a successful start in 2024 as stocks have rallied. And although this year will have twists and turns, the trader is highly bullish about what's next.
"I don't want to doubt this market," Salama said. "I still think it's strong — I don't want to be bearish here. There's too many sectors that are outperforming."
Stocks will pause soon but still have upside
Following a brief consolidation period in early January, the S&P 500 has taken off again and set a streak of record highs. Salama said that stocks can continue to head higher in the medium term.
"The trend is your friend," Salama said. "I don't see this ending."
Salama said the S&P 500's winning streak will end at some point. But the trader explained that a brief pause would be a healthy development for markets.
"We should take a breather," Salama said. "This is similar to running a race — you're going to take a breath here, and we've been on a nonstop tear, essentially, since Halloween."
Chances are, the S&P 500 will top out around current levels of 4,900, Salama said. He added that the index should then stall for a bit before reaching the 4,970 mark in mid- to late-February. Stocks should then run out of steam in March and slip to the 4,750 mark, Salama predicted.
As for what could spark a mild sell-off, Salama pointed to disappointment about interest rates. Markets were overly optimistic, projecting four to five rate cuts starting in March. That now appears unlikely since economic growth has proven to be highly resilient.
Otherwise, stocks will slip once investors no longer believe they're a bargain, the trader noted.
"The 14-day RSI-80% is 5,000, so I wouldn't expect this to get much, much further than that," Salama said. "It's just so expensive. You're going to run out of buyers, and that's what leads to corrections. It's not too many sellers, it's lots of buyers, and I expect you to get that around 5,000."
Even if the S&P 500 takes a hit, Salama doesn't think it will be down for long. He said the index could be back up to 5,200 by the end of April, which would be higher than the recently updated year-end targets from Wall Street's biggest bulls.
At that pace, investors might assume there's no limit to how high US stocks could rise in 2024. However, Salama warned that this year's gains will likely be front-loaded, meaning that equities could top out and trade sideways for the remainder of the year after reaching those levels.
20 top places to invest now
Since May 2020, Salama has traded professionally using his own money, though he works with a proprietary trading firm called Maverick Trading to juice his returns. Salama sacrifices 30% of his profits in exchange for leverage of up to five times, which can give a big boost to his payout.
The professional trader thinks a wide variety of stocks can take off in this market. He spoke of 20 parts of the market or companies that look attractive, though he doesn't have positions in all of them.
"I think you get — not an 'everything rally' — but I do think other underappreciated parts of the market get love," Salama said.
Broadly, index funds tied to the Dow Jones Industrial Average, the equal-weight S&P 500, and the small-cap heavy Russell 2000 look set up for success, Salama said. However, he's also optimistic about both mid caps and mega caps, so there's no size that can't do well.
There's a flight to quality stocks in today's market, Salama said, so he favors technology and communication services companies like Meta Platforms (META), Alphabet (GOOGL), Microsoft (MSFT), Netflix (NFLX), Nvidia (NVDA), and Advanced Micro Devices (AMD).
The Facebook and Google parents are thriving despite weakness in the advertising market while Microsoft became the world's most valuable company earlier this year, overtaking Apple. Netflix is lapping its streaming competitors, as evidenced by its blowout fourth-quarter earnings report, while Nvidia and AMD are semiconductor standouts dominating during the AI surge.
Investors looking for widespread exposure to the two sectors can pursue exchange-traded funds (ETFs) like the Technology Select Sector SPDR Fund (XLK) and the Communication Services Select Sector SPDR Fund (XLC), Salama noted.
Within the consumer discretionary sector, Salama expressed interest in e-commerce, cloud computing, and media powerhouse Amazon (AMZN). Conversely, the trader said he'd fade Tesla (TSLA) — even before its Q4 earnings report completely bombed.
Healthcare is worth staying in despite its forgettable performance in the last year, in Salama's view. The defensive sector was named a top idea among investment firms again for 2024 given its quality nature and ability to stay afloat in most markets.
Finally, financials look enticing, Salama said — especially regional banks like Truist Financial (TFC). The group has a promising technical setup, the trader noted, plus its economic sensitivity is a tailwind in an economy that grew at a surprisingly strong 3.3% pace last quarter.
As an experienced options trader, I've navigated the intricate world of stock derivatives, understanding the nuances of market trends, technical analysis, and risk management. My expertise is rooted in real-world experiences, including successfully anticipating key technical levels and downside targets for major market indices, such as the SPDR S&P 500 ETF.
In the context of the provided article, let's break down the concepts mentioned:
Timing in Trading:
- The article emphasizes the importance of timing in options trading, highlighting the challenges faced by John Salama, a professional trader, who was correct in his market analysis but suffered losses due to being premature.
- Salama expresses a bullish outlook for the market in 2024, emphasizing the strength of various sectors and the continuation of the upward trend. He acknowledges the likelihood of a temporary pause in the S&P 500's winning streak for a healthy market development.
Market Levels and Predictions:
- Salama predicts potential levels for the S&P 500, suggesting a temporary pause around 4,900, followed by a rise to 4,970 in mid-to-late February. He anticipates a slip to 4,750 in March, citing reasons such as disappointment about interest rates and market valuation.
Factors Influencing Market Movements:
- The article mentions that disappointment about interest rates and the market's perception of stocks as expensive could lead to a mild sell-off. Salama specifically refers to the 14-day Relative Strength Index (RSI) reaching 80% as an indicator for a potential correction.
Market Corrections and Recoveries:
- Salama anticipates a potential correction but remains optimistic about a quick recovery, suggesting that even if the S&P 500 dips, it could reach 5,200 by the end of April.
Trading Strategies and Leverage:
- Salama's trading strategy involves partnering with a proprietary trading firm, Maverick Trading, which provides leverage of up to five times in exchange for a 30% profit share. This strategy aims to amplify returns.
Sector Analysis and Stock Picks:
- Salama identifies sectors and specific stocks that he finds attractive, including technology and communication services companies such as Meta Platforms, Alphabet, Microsoft, Netflix, Nvidia, and Advanced Micro Devices.
ETFs and Diversification:
- Salama suggests that investors seeking exposure to the technology and communication services sectors can consider exchange-traded funds (ETFs) like the Technology Select Sector SPDR Fund (XLK) and the Communication Services Select Sector SPDR Fund (XLC).
Consumer Discretionary Sector:
- Within the consumer discretionary sector, Salama expresses interest in e-commerce, cloud computing, and media powerhouse Amazon, while expressing a cautious stance on Tesla.
Healthcare and Financial Sectors:
- Salama advocates for staying invested in healthcare despite its recent performance and sees financials, especially regional banks like Truist Financial, as enticing with promising technical setups and economic sensitivity.
In summary, the article provides insights into the current market outlook, potential future trends, and specific stock and sector recommendations from an experienced options trader, John Salama.