Tag Archives: market

Did GLD Just Enter A Bull Market?

Summary Both GLD and the HUI looked like they were on the verge of one big final drop, then on October 2, the U.S. nonfarm payrolls data for September was released. There are some bearish hurdles that suggest this rally might soon run out of steam. Possible rotation out of the market and into gold is one bullish aspect to consider right now. When you look at the big picture, the chart of the HUI doesn’t show a huge move over the last few months. I started to buy in big on October 2, as I anticipated a run to at least that level given what gold did that day. In June of this year, I turned very bearish on the precious metals sector, as the HUI was starting to break down. Long-term, I’m extremely bullish on gold, and this is where I plan to be invested heavily over the next several years. But the sector needed to put in a final bottom first, and four months ago it began that process. Since that time, the price action in the HUI was playing out almost exactly as I described it would. At the beginning of this month, we were set up perfectly for a final decline in October/November. And then a “curveball” came. As I said in a previous article : “Besides, I simply don’t have a crystal ball. I can’t be 100% sure where the exact bottom is at. Rarely do things in the market go EXACTLY as you expect them to. There will probably be some curveballs along the way.” So what do we make of this latest rally in the SPDR Gold Trust ETF (NYSEARCA: GLD ), as well as the strong rebound in the gold and silver stock indexes such as the HUI and XAU? Is this the start of a new bull market, or is this just one last bear market rally before the final lows are hit? Does this curveball (meaning the HUI deciding to break higher, not lower) change the outlook? Well, I’m certainly still very cautious right now, but I have moved back to neutral until we get more clarity on a few things. Both GLD and the HUI looked like they were on the verge of one big final drop, and then on October 2, the U.S. nonfarm payrolls data for September was released. The report said the U.S. economy created only 142,000 jobs in September, economists were expecting 203,000 new jobs for the month. And the data from August was revised downward to 136,000, from the first reported 173,000 figure. (Source: CNBC ) Investors interpreted this miss as further proof that the Fed would most likely hold off even longer when it came to raising rates, and gold spiked as a result. You can see the huge move in price and the massive volume that occurred just after the jobs report was released at 8:30 a.m. EST. (Source: Business Insider ) GLD has added to its gains over the last week or so, as have the precious metal companies. Many gold stocks have had strong percent increases during that time – climbing 25% or more. Hurdles To Overcome Given the rebound that has taken place this month, or maybe I should say stick save, some would argue that the lows are in. But there are some bearish hurdles that suggest this rally might soon run out of steam. These would need to be overcome before we could start to talk about a new bull market. The first hurdle is we didn’t see a capitulation type event in gold and silver, but one could make the argument that we did in the HUI. GLD had a slight downdraft in June and July, which amounted to only about a 9% decrease during those months. The HUI on the other hand, dropped 40%. Gold and silver stocks have a lot more leverage than GLD, but the massive carnage in the miners seemed to be suggesting that GLD was about to drop further. It didn’t though, instead, GLD rebounded and now it’s only down about 2.5% from where it was at the start of June. The HUI, on the other hand, is still down 21%. There is a big divergence occurring, and the gold stocks are still predicating more downside. Unless they can get back in line with the price of gold very soon, then GLD is going to decline once again. It almost feels like an incomplete bottom. Had GLD moved down a lot further, then it would be easier to say the lows are in. But that is not what has happened. Gold would need to move above $1,200, or 115 on GLD, for this rally to have some real momentum behind it. Until that happens, it’s too early to say the bear market is officially over. The short-term trend might be up, but the long-term trend isn’t yet. The second hurdle is, given that the mining stocks are down significantly for the year, they could start to be hit with tax-loss selling. The recent rebound has “painted some lipstick on these pigs,” as the losses were a lot worse just a scant 2 weeks ago. But the vast majority of these gold and silver miners are still showing hefty declines YTD. Goldcorp (NYSE: GG ) is down 21.7%; it was down 35% YTD at the beginning of this month. The rest listed below are still lower by a sizable percentage. There has been a major improvement since October 2, but as you can see the losses are still there. It’s possible that the rally continues and most of these are erased, but if it doesn’t, then tax-loss selling can feed on any stagnation or further decline in the HUI and XAU. (Source: YCharts) The third hurdle is the Fed still hasn’t waived the white flag. It delayed hiking rates, but in no way has it suggested they are completely off the table for this year – even if economic data is weak. The temper tantrum that the stock market threw in August was the main reasoning the Fed has pushed back its timing for the first rate increase. But the market is now assuming that the Fed will wait until 2016, or possibly even later, before it raises rates. I’m not convinced that is going to happen. The Fed stands to lose a lot of credibility if it doesn’t begin to increase the Fed Funds rate this year. It might come as a shock to some investors, but the Fed has been implying for the last 3 years that it would raise rates during 2015. It hasn’t deviated at all from that plan. If you look below, you will see that the latest meeting in September showed a large majority of Fed members/participants believe that policy tightening should happen in 2015. That has been a consistent message since September 2012. Imagine how it would look if all of the sudden they flipped. (Source: Federal Reserve) After the September meeting concluded, Fed Chair Janet Yellen said at the news conference that followed: “The recovery from the Great Recession has advanced sufficiently far, and domestic spending is sufficiently robust, that an argument can be made for a rise in interest rates at this time. We discussed this possibility at our meeting. However, in light of the heightened uncertainty abroad, and the slightly softer expected path of inflation, the committee judged it appropriate to wait for more evidence including some further improvement in the labor market to bolster its confidence that inflation will rise to 2 percent in the medium term.” “Now, I do not want to overplay the implications of these recent developments, which have not fundamentally altered our outlook.” “The economy has been performing well. And we expect it to continue to do so.” Yellen further made it clear that the crash in the Chinese market, as well as the severe decline here in the U.S, was the reasoning for the delay in rate hikes: “The Fed should not be responding to the ups and downs of the markets and it is certainly not our policy to do so. But when there are significant financial developments, it’s incumbent on us to ask ourselves what is causing them. And of course while we can’t know for sure, it seemed to us as though concerns about the global economic outlook were drivers of those financial developments.” “And so they have concerned us in part because they take us to the global outlook and how that will affect us.” Even though the disappointing September jobs report was released a few weeks after Yellen’s news conference, it should have no major influence on the decision of when to hike rates, as Yellen stated at the time: “As I noted earlier, it remains the case that the timing of the initial increase in the federal funds rate will depend on the committee’s assessment of the implications of incoming information for the economic outlook. To be clear, our decision will not hinge on any particular data release or on day-to-day movements in financial markets. Instead, the decision will depend on a wide range of economic and financial indicators and our assessment of their cumulative implications for actual and expected progress toward our objectives.” The Fed is looking at the big picture, not single pieces of economic news. Major declines in global stock markets are really the only thing that would probably give the Fed a good reason to pause. The economy is in decent shape, and the Fed isn’t going to wait until things look peachy either, as per Yellen: “If we waited until inflation is back to 2 (percent), and that will probably mean that unemployment had declined well below our estimates of the natural rate, and only then did we start to begin to … diminish the extraordinary degree of accommodation for monetary policy, we would likely overshoot substantially our 2-percent objective and we might be faced with then having to tighten monetary policy in a way that could be disruptive to the real economy. And I don’t think that is a desirable way to conduct monetary policy.” Even Stanley Fischer, vice chairman of the Federal Reserve, said in August that officials: “would not be able to postpone a decision until all doubts were resolved.” “When the case is overwhelming,” he said, “if you wait that long, then you’ve waited too long.” The statements from the Fed, as well as their consistent expectations over the last few years for policy tightening starting during 2015, seem to strongly suggest that we will see at least a 25 basis point move at either the October or December meeting (most likely December). Investors should recall that just two years ago, the expectation was for the Fed to announce at its September 2013 meeting that it was going to taper its bond purchases. The stock market, and in particular the bond market, started acting up in May of that year in anticipation of this major change in policy. The Fed decided to hold off at the September meeting, as it wanted to give the market a little more time to adjust. It finally started to taper in December of that year. We could see a repeat when it comes to the first rate hike, sometimes the market just needs a bit more time. So I believe that rate hikes are still on the table, and this should be clear at the conclusion of the next Fed meeting in a few weeks. If this occurs, then gold could come under pressure again. But it will be short-lived, I’m looking for a “sell the rumor, buy the news” event. One Bullish Aspect In Play If I had to point to one positive development for gold, it would be the decline we have seen in the major U.S. indices. Some readers might recall that I have always said the main competition for gold over the last several years has been the stock market, not the USD. Gold is always going to increase over time, no matter what the U.S. dollar is doing. What has taken the shine off of gold over the last few years has been the gargantuan rally in stocks. The concept of investors chasing returns is a familiar one, and with the run that the Nasdaq, S&P, and DJIA have had since 2011, it shouldn’t come as a shock that the gold market was suffering from lack of attention and investor dollars. (Source: StockCharts.com) It has been my argument that only when the market finally peaked and started to roll over, that gold would bottom out. Since this time last year, I have expressed my belief that not much in the way of gains would be seen in the stock market during 2015. In an article this past June, before the market started to collapse, I said the following: “The stock market has had an incredible run over the last 31/2 years. While they don’t ring a bell at the top of a bull market, I would say this is either close to being over or is over. That doesn’t mean we can’t keep hitting marginally higher highs during the next 6 months or so, just like we have been doing since the beginning of the year….There is always the possibility for a blow-off top to occur as well, but either way the easy money has been made and the stock market is very unappealing right now.” I was expecting a big sell-off in the stock market towards the end of this year or early 2016. Well, the time-table got pushed up, as investors started to liquidate in August. This market now officially looks broken, and I don’t believe we are going to see new highs anytime soon, especially not with the Fed looming in the background. So one could make the argument that the smart money knows the bull market in stocks is over, and it’s time to look for assets that are undervalued and have underperformed everything else since 2011-2012. The most logical place to rotate into would be the precious metals sector. Unless the stock market can have one final hurrah and stage a decent rally over the next few months, this rotation could continue, and that would put a firm bid under the price of gold. Below is a chart that I created using historical data points for the S&P, Gold, M2, and the USD. I showed this chart in a previous article a few months ago when I talked about this eventual rotation out of the stock market and back into gold. Unless you are in some type of hyperinflationary environment, when gold does well, the stock market will underperform, and vice versa. This inverse correlation was very apparent in the 1970s, and has been since that time. Keep in mind we are talking long-term trends here, as gold and the stock market can rise and fall in tandem for months at a time. But when you compare long-term performances over many years, they just don’t have their respective bull markets occurring during the same dates. As you can see, gold and the S&P continually move higher with the money supply. But gold and the S&P usually move inverse to one another and oscillate around M2, as it increases in quantity. So when the S&P is in a long-term bull market (such as from 1980-2000), gold is in a bear market, and vice versa. This will eventually reverse course again, and it could be starting now. If that is the case, then over the next few years, the gold line will start to trend above the red one, and the blue line will trend below it. Over the long-term, the direction of the USD is irrelevant. Source: Ycharts.com/author/FRED As the saying goes, “never fight the Fed.” The stock market has had an incredible run over the last several years; it’s going to take a monumental effort to keep that going if rates are about to increase. Money is rushing out of stocks a little sooner than I anticipated, and this “hot money” needs to find a home somewhere. Gold is the most logically choice. So possible rotation out of the market and into gold is one bullish aspect to consider right now. If This Is The Start, It’s Still Very Early In The Game There is a lot of anxiousness and confusion right now in the precious metal sector. Everybody wants to time this perfectly, or maybe I should say those on the sidelines that are calling for lower lows. This is a great opportunity and investors want to maximize their gains. But most that are familiar with this sector know just how volatile it can be, and they know that the gold stocks can be down 30-40% in a heart beat. Nobody wants to step in front of this train if there is even the remote possibility for more downside. The gold sector hasn’t been kind to many portfolios over the last few years. But while it would be extremely rewarding to nail the lows in gold and the precious metal stocks, it’s not necessary. The sector was massively undervalued to begin with, and still is, even considering the money that has been made since early October. When you look at the big picture, does the chart below reflect a huge move in the HUI over the last few months? No, it doesn’t, it looks like a blip on the screen. Even at 250, the index would appear to be just barely off the mat. If this is in fact the start of a new bull market, and I’m not suggesting it is yet, then it’s very early in the game. Heck, we are just at the “singing of the national anthem stage,” the game hasn’t really even begun yet. Of course the chart below also supports the bearish argument that there simply isn’t enough evidence yet to call a bottom. (Source: StockCharts.com) It’s important to keep perspective here. So if you are still on the sidelines, know that if this is the start of a new bull market, then we have a long-long way to go. If you are even paying attention to this sector right now then you are at a big advantage compared to everybody else. My Updated Plan Of Action As I mentioned at the start of this article, I have been very bearish on gold since the beginning of June. However, as I told readers in early August, I was hedging my bets. The HUI was extremely oversold at the time, and at minimum, I expected some sort of rebound. I wasn’t convinced that the lows in August were the final lows, but if they were then I would at least have a decent size build-up of precious metal shares. It was a very low risk opportunity at the time given the incredible pricing of the gold and silver stocks, and I felt that it was imperative to take advantage of it. I didn’t jump all in, but I did establish many positions. The plan since then has been to get in heavily, if the HUI breaks above 130; that was the key level to be taken out for me to get a lot more constructive in the short term. But I started to buy in big on October 2, as I anticipated a run to at least that level given what gold did that day. I’m not acquiring these stocks on the notion that the bear market is officially over, rather I always just follow major support and resistance (as well as my gut). It has allowed me to avoid losing money in this sector, and is the reason I’m up for 2015 even though the precious metal complex is showing losses – sizable ones for many of the stocks. I’m now neutral on the sector, given the recent gains. I’m going to hold for a bit and see what happens. I have some good profits so I don’t think I’m taking a big risk. Should this short-term move peter out, then I will look to book some of those. The real tests still lie ahead, until those are passed, we can’t label this a bull market yet. For now, let’s see how this rally plays out and what the Fed says at the conclusion of its October meeting.

Do Price Targets Matter In Volatile Markets? (And, Why Alpha Theory Should Be A Starting Point Even In Turbulent Times)

This blog was co-authored with Alpha Theory’s Customer Relations Manager, Dana Lambert. “Stock prices will continue to fluctuate – sometimes sharply – and the economy will have its ups and downs. Over time, however, we believe it is highly probable that the sort of businesses we own will continue to increase in value at a satisfactory rate.” – Warren Buffett, famed investor “While many have portrayed the current environment as a highly risky time to invest, these individuals are likely confusing risk with volatility. We believe risk should be determined based on the probability that an investor will incur a permanent loss of capital. As market values have declined substantially, this risk has actually diminished rather than increased. “- Bill Ackman, Pershing Square 3Q08 Investor Letter The recent market environment has proven challenging for many funds, including Alpha Theory clients. The market has been volatile, but the real challenge is directionality. As of September 28, the S&P was down 11% over the prior 49 trading days, with 30 of the 49 days being down. Alpha Theory clients generally benefit from pure volatility (large ups and downs without a direction) because they are buying on dips and selling on rises (mean-reversion). The problem with a uniformly down directional market is that clients are continually getting indications to add to their longs and trim their shorts – the proverbial “catching the falling knife”. Although Alpha Theory cannot overcome persistent negative correlation between scenario estimates and outcomes – in other words inaccurate research – it does offer three options to help clients deal with these circumstances. OPTION #1 – RAISE PREFERRED RETURN. When the price of an asset falls, its probability-weighted return (PWR) rises. When the PWR rises, the normal action is to increase your position size. But when all asset prices fall, all PWRs rise and thus the longs become more attractive and the shorts less so. This suggested increase in long exposure may not be tenable and there may be a general skepticism regarding the price targets. In this situation, a manager can raise the preferred return for longs and thus raise the ‘hurdle rate’ required to be a full position in his or her fund (i.e., before you required only a 40% PWR to be a full position, but in this market environment you require 60%). This will immediately lower long exposure and only suggest adding to the best ideas. In the extreme example of February 2009, clients raised their hurdle rates to 70% or 80% and were able to see quickly numerous compelling ideas and how to shift capital appropriately. OPTION #2 – RELATIVE INDEX ADJUSTMENT. As the market falls, the “market multiple” decreases – which has ripple effects through the price targets in Alpha Theory. For those who cannot re-underwrite all of their targets for the new market paradigm, the application offers an easy-to-use feature called ‘Relative Index Adjustment’. This basically adds back the move of the market to an asset’s expected return, and the following would be an illustrative example. If the market is down 11%, then most assets’ prices will also be down and their suggested position sizes will increase. Now let’s turn on the Relative Index Adjustment. If every asset is down 11%, commensurate with the market move, then Alpha Theory will adjust the prices so that there is no change (-11% Stock Move minus -11% Market Move = 0% change) and thus no suggested change in position size. The beauty of this system is that you can turn it on and off and the Market Move is calculated since the last price target update. So if an analyst updates a price target, the Market Move gets set back to zero because the analyst would take into account the new “market multiple.” OPTION #3 – RE-UNDERWRITE CONSERVATIVE PRICE TARGETS. Fundamental investors recognize that there is no absolute intrinsic value for each asset because their assumptions are subjective. There is, however, a range of assumptions that span from aggressive to conservative. Down markets imply that pushing your assumptions to the conservative end of the spectrum may be appropriate. After doing this, you can see which assets are still suggested buys and which are not. The confidence imbued by using the most conservative assumptions allows you to be aggressive with add and trim decisions. A few views to help isolate where to start the re-underwriting process are: Performance view : shows those assets that have suffered the most on an absolute and relative basis Group by Risk/Reward within 10% : groups the assets that are within 10% of Reward and 10% of Risk targets (click to enlarge) While consideration of the aforementioned steps certainly is appropriate, as you develop conviction about downward directionality for the market, it is also worth noting that volatile markets can often be followed by periods of relative calm and distinct upwardly-biased directionality – and of course this has been the pattern for the past several years now. So where in one week an analyst or PM sees a 1-year target as likely to be unachievable, the next week suddenly the expected return gap narrows considerably. In short, just when you may be losing faith in your targets, they can quickly fall back into an attainable range. Directional markets that move quickly are challenging for many reasons. It is easy to throw up your hands and rationalize that “price targets don’t matter” or “our research is wrong”. It is hard to restrain those emotions and redouble your efforts to find the value that has been exposed in the quick, volatile relocation of asset prices. To do so requires a rigorous, disciplined process that begins with retesting assumptions (i.e., raising return hurdles, adjusting for the market move, and setting more conservative targets). If, after re-underwriting price targets and portfolio inputs, Alpha Theory is still recommending upsizings, then you can feel confident in your actions … even in a volatile, directional market.

Higher Interest Rates Lead To Increased Volatility – How To Prepare For A Volatile Market

Summary Again, the Fed is threatening to raise interest rates. The results of my statistical study show that increasing interest rates leads to an increase in overall market volatility. Whether liquidating or investing in an increasingly volatile market, you have several strategies that can give you an advantage. I have had several requests for statistical analyses on individual stocks, but recently I was asked to look into the correlation between interest rates and volatility. This request does not come as a surprise for two reasons. First, although Chairwoman Yellen recently passed on raising interest rates , others are stating that, regardless, we will see a rise in interest rates this year . Many are asking what will happen to the market once this happens. Second, the VIX and its associated ETF, the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ), are looking increasingly bumpy. This time of year tends to bring bumps in the VIX, with a dip and subsequent rally. Investors are wondering what will happen to the VIX (which can be thought of as an overall measurement of how risky the market is at the current time) if interest rates increase. An increase in interest rates could just be the catalyst to bring back market volatility. But does an increase in interest rates truly bring an increase in volatility? Though I could find a few articles online claiming this fact, I found no previous statistical analyses on the subject. Some images backing the claim of a correlation between interest rates and volatility are examples of exactly what you don’t want to rely on as an investor: curve-fitting. I’ve seen too many “analysts” run models over and over until they find a couple of curves that seem to line up. This is exactly what the following two images display: The first chart shows the T-bill yield and VIX apparently lining up in perfect accord. But there are three problems here: First, a logarithmic transform was applied to the VIX line. This changes the shape of the VIX line. I suspect this was done to make the VIX curve better resemble the yield. While logarithmic scales can be useful for looking at indexes or stocks – especially when comparing two stocks trading at drastically different ranges – logarithmic scales should not be used without reason. A proper statistical model first states that the logarithmic scale should be used and gives reason for using it. I suspect that this analyst simply found the logarithmic conversion to produce the curve he wanted, meaning he was playing with data to confirm his conclusion rather than performing a true analysis. Second, the yield was transposed two years. Again, this is likely an action with the motive of making the two curves match. If the yield was not transposed to the right, the graph would show the opposite of what the author wanted – i.e., the graph would imply that yield and the VIX have a negative correlation! It simply makes no sense to move one index two years forward in time. This is especially true when the T-bill used is only a 3-month T-bill! Is the analyst trying to say that the VIX today can predict the price of a 3-month T-bill two years from now?! The second chart is equally absurd. This time, the VIX is plotted with the 2-year and 10-year yield curve (i.e., the slope of the yield curve, measuring the difference between the yield of a 10-year bond and 2-year bond). The absurdities follow: First, this analyst does the same as the previous analyst; he moves the entire yield curve forward two years. Again, this would imply that the VIX today is predicting something precisely two years from now. This is another sign of curve-fitting. Second, the analyst inverts the yield curve. There is simply no reason to do so – unless, of course, your goal is to get a desired look to your chart so you can draw a conclusion, which is the exact definition of curve fitting. Interpreting the inverse of a function in words is a difficult task – so knowing that the VIX is correlated with the 2-year future inverse of the yield curve tells us nothing! As you have probably concluded, we need a more formal way of determining the relationship between interest rates and the VIX. In this study, I set up the following set of hypotheses and test them statistically: Set 1: H0: The VIX is uncorrelated with yield rates H1: The VIX is correlated with yield rates Set 2: H0: The VIX is uncorrelated with the yield curve H1: The VIX is correlated with the yield curve The Study As you can see, the test will be simple – no data transformations or curve-fitting. I collected the data from the VIX for each day, starting from 2004. I did the same for the bond market. Because the stock market and bond market have a few days per year in which one market is closed while the other is open, I removed such dates from the analysis. I did so to allow a one-to-one comparison for the VIX and yield each day in the market. Thus, daily movements in the VIX and movements in the bond market will be tracked. For the VIX data, I used the closing values. For the bond data, I used 2-year bonds, which is more or less the “middle ground” for bonds. For the yield curve, I used the difference between 1-month and 20-year bonds, giving the widest and most sensitive curve. If anyone has any qualms with these choices, please let me know in the comments section below and I can rerun the analysis with your chosen values (e.g., daily VIX highs vs. 20-year bonds). I used an alpha level of 0.05 as the comparison point for the p-value. Correlation tests for the hypotheses that reported p-values less than 0.05 would be considered evidence for the rejection of H0, giving strong evidence for H1. The Results The results follow: Yield Yield Curve Correlation with VIX -0.2680 0.3581 p-value for correlation depreciated dollar -> increased yield curve -> increased VIX But the yield curve is actually moderated by the supply and demand of capital. Decreases in the money supply (e.g., M2 money supply), increased government deficits, and less money flowing into savings can all increase the yield curve, thereby spiking market volatility. In addition, commodity prices affect the yield curve. Generally, decreasing prices steepen the yield curve because they decrease short-term inflation expectations. This pulls the left side of the yield curve downward, making the curve steeper on the whole. In other words, when commodity prices drop, the yield curve steepens, and the VIX should see an increase. But our current market, in which commodity prices are at all-time lows, doesn’t seem to have an increased VIX, which is interesting from a theoretical standpoint. Overall, the picture is complicated: (click to enlarge) Investment Strategies for a Volatile Market For now, we can expect that the yield curve will steepen and prepare our portfolios for such an event. I don’t recommend buying the VXX outright because it’s a garbage imitation of the VIX and will cause you to lose money in the long run. However, a spike in VIX should result in a spike in the VXX, which could leave you with a handful of cash should you have call options on this ETF. But let’s look at some more realistic strategies (I hate the VXX). If volatility increases and you are a risk-averse investor, the easiest “safe” strategy is to exit the market – as reasonably as you can – before increased volatility hits. Of course, most people reading this are likely “buy-and-hold” investors, so such a method might be lost on you. One fundamental idea behind the buy-and-hold strategy is that you don’t want to miss those days with the most significant returns, which tend to happen during days of high market volatility. Of course, if you’re in the market all the time, you’re also gaining exposure to those days with the most significant losses. And a significant loss hurts a lot more than a significant gain. Going from 100 to 80 requires a 20% drop, but going from 80 to 100 requires a 25% gain. The uphill battle is harder. Perhaps the best selling strategy is a staged sale strategy. In this strategy, you sell predetermined chunks of your stocks and either hold cash or reinvest (see below). The staged sell is like the opposite of dollar cost averaging. If you don’t want to worry about market timing but want to liquidate, staged selling is your best bet. Nevertheless, for buy-and-hold investors, volatile markets can be gold mines. An increase in volatility in the general market will not hurt the fundamentals of a company. Thus, a volatile market will allow you access to sporadic dips on stocks with solid fundamentals. This is a good time to buy such stock. However, when buying, realize that some things are different in a volatile market. If you’re not in the habit of buying with limit orders, get into that habit now. Volatile markets move quickly and have high volume; your market order is likely much different from that what you expect. In addition, the bid-ask quotes you’re looking at now might be very different from the real bid-ask quotes. And then there’s increased delays and slippage… This is all general strategy. What about choosing individual stocks during a volatile market? As stated, a volatile market gives you access to a myriad of stocks that hit dips simply as a result of increased volatility on the stock. In the past, such a low would often be explained by the company’s fundamentals. But in a volatile market, the lows that looked large in the past will soon be considered the norm. As a fundamental investor, your best bet is to ignore the daily changes in stock price and instead set a buy limit order that you consider to be “too low.” Set the order as “good for the month” and get your stock at a discount. As for the types of stock to add to your portfolio, choose stock that are relatively safe and undervalued during periods of increased volatility. REITs make good choices. Switching out low-yield dividend stocks for high-yield dividend stocks makes sense, just as switching out growth stocks for value stocks makes sense. Depending on your portfolio, this might be a good time to step back and question the purpose of the portfolio. Are you focused on growth? Passive income via dividends? In the previous case, you should have an existing exit strategy. Perhaps now is the time to take your profits and look to restructure your portfolio with undervalued growth stocks. If your goal is passive income, holding on to your current dividend stocks and REITs makes sense in terms of your overall objective, and you might have no exit strategy at all. But at this time, a day’s worth of research into your current dividend stocks’ fundamentals can give you some clues as to whether dropping the stock for cash (or switching it out for a better option) is the right choice. Overall, for investors, getting defensive as the market has a seizure isn’t the right strategy because you should have been defensive in the first place. But let’s assume you need to get defensive all of the sudden. What are some immediate actions you can take? Switching out common stock for preferred stock is a good choice because preferred stock tends to have lower beta – i.e., it’s less correlated with general market moves. Dropping the beta of your overall portfolio can ensure that your portfolio contains companies that you believe are fundamentally strong and yet will not be hit hard by market corrections. Here’s a general common-to-preferred and visa versa strategy for volatile markets: Switch out common stock for preferred stock when the market appears to be overbought. You’ll have sold common stock at a high, switching them for preferred stock that are more protected against drops. If the market does drop for an extended time, drop the preferred stock, which protected value and brought you dividends, in favor of common stock, which you can now buy at a low. Overall, you want to drop your portfolio’s beta when you believe the volatility is coupled with a downward trend. You should still perform well during the good times at the same time you’re protecting your capital with a low-beta portfolio. The following are some low-beta stocks I recommend: Pfizer (NYSE: PFE ) Wal-Mart (NYSE: WMT ) Avista (NYSE: AVA ) Request a Statistical Study If you would like for me to run a statistical study on a specific aspect of a specific stock, commodity, or market, just request so in the comments section below. Alternatively, send me a message or email.