That is the question. Markets, as I have previously noted, do not just bottom and then rocket upwards. Nor do they just top out and crash. Both events are processes and it takes time. Right now we are in what looks to be a bottoming process, but that usually requires further consolidation. We have successfully retested the “bottom” of this range at S&P 1120, but it remains to be seen if that is the ultimate floor during this correction.
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There are few things on the horizon that would constitute as good news right now and that means there is a lot of further potential volatility in the market in the weeks and months ahead. If this were a true, blue rally, the volatility index or VIX would be much lower than it is right now, back into the mid 20s. It’s not. It’s still in the 30s and that is a sign that volatility has not yet abated. If the VIX trades down to the 25 level or below, that will signal less volatile times ahead.
Once again, it’s time to prepare a list of stocks that you might want to buy if a further correction ensues. Investing is not what it used to be, but trading has become more exciting and I am happy to report that the herd mentality is still intact. That means opportunities abound in a correction. Knowing that money will ultimately keep flowing into the market, thanks to the zero interest policy of the Fed, means that the potential for sharp rebounds after strong falls is still how you want to trade the market.
To get the best bang for your buck in this type of scenario, you want to focus on high beta names. These are names that can jump multiple percentage points in a day during a rally – of course, the flipside is also true. Right now, the highest betas can be found in the financial sector. Note the trading action in Bank of America for example. In the trading sessions during the month of August, the shares moved from $10 to $6 and back up to almost $8.50 by months end. Other financial shares like JP Morgan and Citgroup have displayed similar volatility.
The most volatile sector during the month was gold, moving from $1,600 per ounce to $1,900 per ounce with several days of $30 plus moves in both directions. The way to play gold is through the GLD exchange traded fund and if you are not up to spending $180 per share, you may want to consider short term options on the GLD which have been packing a serious punch over the same time period.
Ultimately, this period in the market will pass and we will return to normalcy. But, it is at times like this that you can really scoop up some bargains in companies that you always wanted to own at bargain prices – companies that pay nice fat dividends and are in no danger of going out of business. Pharmaceuticals and Utilities come to mind. During the correction, they corrected as well – the baby and bathwater syndrome. Yields topped 5% for many of them – that’s about 500 basis points more than your checking account pays you, plus the potential for long term capital gains.
It’s always easier to do nothing during times of volatility, but sometimes it worth doing something especially when the market is handing you opportunities that will enhance your future standard of living.
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