How to Invest in Volatile Markets

There’s no getting around the volatility in the stock market these days.
It’s seems good news one day is offset by bad news the next.

It’s maddening for investors to watch their investments yo-yo back and
forth. Even the best, most stable stocks in the market are not immune
from the volatility.

At times like these, it’s often a good idea for individual investors to
step back from the day-to-day swings of the stock market, and identify
long-term trends that are not likely to change, no matter what happens.

Biotech Buyouts

They say March comes in like a lion and goes out like a lamb. We’ll see about that. March started with a strong rally that’s added +50 points, or 4.4% to the S&P 500. That’s as good a monthly performance as you’ll find. Perhaps too good…   


Stocks have come so far, some are now wondering, what’s left? And after today’s ADP Employer Services employment report showed that private companies cut payrolls by 23,000 in March. That’s a far cry from the gain of 40,000 economists were expecting from this report. And it raises the fear that Friday’s release of the Labor Department’s Nonfarm Payroll report will come in far short of the expected 190,000 jobs growth.  


Of course, the government’s report will include census workers, so it’s likely to better than the ADP report. But still, the market is left waiting for jobs growth. 

Unemployent falls and so do stocks

Yesterday’s decline reversed the rally we enjoyed to start the week. The S&P 500 is now below support at 1071. Is that a death knell? No. But it’s not good, either.

Mounting debt problems in Greece, Spain and Portugal are spooking investors. Oil prices are lower as investors worry the global recovery isn’t gaining momentum.

The Labor Department reported that companies cut 20,000 in January. New unemployment claims also rose. But somehow, the unemployment rate fell to 9.7%. I’m not going to call that a “damn lie”, but statistics don’t always tell the whole truth.

We’ve noted frequently in Daily Profit that we can expect to see some pretty wild swings in the data as the housing market and unemployment rate bottom. One month’s positive data gets revised lower, and then the next month’s negative data gets revised higher.

There’s no doubt the economy is improving, but is it happening fast enough? And perhaps more importantly, where will the base-line be?

An unemployment rate around 4%-5% used to be the norm. We’re certainly looking at a higher base for unemployment over the next few years. GDP growth will be lower. Investors will probably support lower P/E ratios and levels for the major indices.

That’s not a disaster, but it does mean you’ll need to be focused on value and not afraid to take profits when you have them.

Re-pricing Banks

It’s clear that investors are re-pricing stocks for the possibility that the proposed restrictions on banks’ trading practices will impact their profits in the future. The UltraShort Financials ETF (SKF) has rallied 11% in 2 days.

Yes, bank stocks are getting hit pretty hard. But Obama’s proposed restrictions aren’t yet law, and there’s plenty of reason to believe he won’t get everything he wants. More about that in a minute…

But first, I want to point out that this situation is how the "buy the rumor, sell the news" dynamic starts. Now, granted, this is a reverse example because investors are selling stock in anticipation of bad news rather than buying ahead of good news. Still it’s a good example of how investors are pricing in a worst case scenario now, before any proposals have become law.

I think we can expect to see bank stocks rally once the reality of ay proposed restrictions is finalized. But as we know, investors don’t like uncertainty.

Can’t Ignore This One

You’ve probably noticed I tend to stay away from political debates. And with good reason. I learned a long time ago that it’s best not to talk politics and religion. And besides, carrying a political bias into your investing and trading will affect how you see things, and make you more prone to mistakes.

For instance, think about all the investors who were up in arms that the dollar would crash because of the amount of debt the government’s been taking on. I haven’t published that Dollar Index chart in a while, let’s have a look…

Federal Department of Goldman Sachs

The Federal Department of Goldman Sachs (NYSE: GS) beat earnings
expectations with a $4.79 billion profit for the 4th quarter. Goldman
has strong gains in its investment banking division, which handles
stock and bond underwriting deals. Go figure. With companies selling
debt and stock like crazy to pay off TARP money and improve their
balance sheets, it’s no wonder Goldman did well.

Goldman earned
$13.4 billion for the year. But I haven’t seen if this figure includes
the $25 billion in funneled TARP money it received from AIG (NYSE: AIG)
to pay off credit default obligations (CDOs).

As you know I’ve
criticized Treasury Secretary Geithner for handling the banks with kid
gloves. And the fact that his office attempted to suppress the
transaction that had AIG paying Goldman off with bailout money is more
than just a black eye for him, in my opinion.
President Obama was wrong to nominate him. But you have to wonder how
much choice he had. After all, the Federal Department of Goldman Sachs
is pretty powerful.