By now, investors/traders should be used to the market moving up or down heavily in 2012, depending on macroeconomic headlines. This closely resembles the action in 2011. Should investors be concerned about this wild market? Well, yes and no. The market is changing and so should investors. Instead of worrying and complaining about the volatility, how about finding ways to profit from it? This article lists three strategies we have used so far with reasonable success, making use of the volatility.
- Sudden High Yielders: As we've written in a few recent articles, Freeport-McMoRan (FCX) is all of a sudden a stock that yields almost 4%. We still remember very well, back in 2011, this stock was yielding just 1%. Weakness in China, a few pull backs here and there, coupled with a dividend increase - we are looking at a solid industry leader yielding 4%, which is way above the market average. Freeport's balance sheet is improving by the day as well. Be careful though to not get into junk high-yielders during these drops. Philip Morris (PM) is another example coming to our mind, from 2011, when the stock dropped to its 4% yield point of $76. This technique can be used by almost everybody.
- Trading The Range Bound Stocks: Southern Copper (SCCO) is a perfect example of a range bound stock. Intel (INTC) and Microsoft (MSFT) were in the same boat until their recent breakouts. SCCO has traded between $28 and $32 range for the most part recently. Trading these range bound stocks would add to your investment returns substantially. The key here is to be disciplined and quickly sell once your initial goal is reached. Do not treat these trades as long term investments just because you are losing money on them. This technique is for the ones who are open to trading and accept the periodic losses that come with it.
- Going Long On the Inverse ETFs: Now, out of the three points mentioned, this is the one you must be really careful about using. The inverse ETFs like Direxion Daily Small Cap Bear (TZA) trade as polar opposites to the general market. These bear funds are in red on market green days and in green on market red days (for the most part). Given how volatile the market has been recently, these ETFs can act as your protection on down days. Yes, it's almost like shorting a stock but you are picking an ETF for that, avoiding the risks of shorting a stock directly. These ETFs usually reflect the general market weakness, hence a good way to hedge your portfolio against macro economic conditions. However, they move up or down in flash. Do not play them if you are not swift. If you do play, keep your stop losses in place.
Conclusion: While there are other obvious reasons for the long term investor to love market dips - like averaging down and finding bargains, we hope the above mentioned reasons help you keep your chin up the next time the market dips violently. Remember, there are tons of ways to make money in this market.