The Perils of Trading this Market

Last week was a doosie. In fact the whole month of September has been a wild ride. And not just for stocks but for gold as well. Never in the history of the markets have we had so much sustained volatility as we have experienced in the past few years. There is a good reason for this: computers.

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Computerized trading accounts for almost 75% of the volume in the market today. These computers operate on complex algorithms that pick and choose points to buy or sell stocks based on a variety of input factors ranging from technical analysis to things like hourly volume and directional trades on key stocks. Problem is that they all seem to be on the same page. So, when one set of data triggers a sell signal, guess what? They ALL start selling and you get massive moves down in a matter of seconds. Individuals cannot trade as quickly.

This puts you at a distinct disadvantage when it comes to trading the market. You can and WILL get whipsawed. The solution is actually quite simple, but it requires patience. It’s nothing more than taking advantage of major sell-offs to accumulate high dividend paying stocks – quality high dividend paying stocks.

If you haven’t noticed, banks are paying you nothing for your money. At the same time, some companies like Verizon, Merck, Bristol Myers, Con Ed, and Progress Energy are all paying more than 4% and some over 5%.

During the recent series of corrections these stocks have lost the least and have recovered fastest. In fact the utilities and Bristol Myers are setting new 52-week highs. The reason is that the computers can control short-term movements, but they cannot overcome investor demand for yield in this market. So, when you see the market swoon, really swoon, take a look at the high yielder’s and that is where you will find the real bargains.

Goldbugs took it on the chin in September. After a dizzying ride higher, some $400 per ounce in no time flat, the metal took several one-day dumps with losses eclipsing $100 per ounce in a single session at times. Wow! Who would have thought that a safe haven could be, well…so unsafe?

Don’t blame gold. Blame the computers again. The magnitude of the losses is exacerbated by the fact that the gold market is tiny in comparison to the stock or bond market. This makes for even greater volatility and bigger directional moves.

The gold stocks had been signaling the move lower as they had been very late to participate in the rally. Gold shares are down sharply again and they do represent an opportunity right now. Gold prices will be volatile for the rest of the year and likely well into 2012. As long as crises dominate the news, gold will react sharply. However, gold prices will not break down to $1,000 or below and that means gold companies who produce gold for $400 to $600 per ounce will continue to literally mint money. If you’re looking for some real bargains in the market right now, you should set your sights on quality gold shares like GoldCorp (GG-NYSE).

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