Thank Goodness For 'The Fear Indicator' And These 5 Investment Choices

by: Marc Courtenay

"We have nothing to fear but fear itself". (Franklin D. Roosevelt, 1882-1945, 32nd President of the United States)

Fear can be an investor's worst enemy, followed close behind by greed. This doesn't mean we shouldn't take our investing seriously. The need for caution and awareness has never been greater in this world of high-frequency trading and robo-computer interferences.

Yet there are constructs like "The Fear Indicator," a.k.a "The Fear Index" that can cause false readings and erroneous market conclusions. Since the CBOE Market Volatility Index, often referred to as the "Fear Barometer," went down 9% last week and hit a new low for the year, some are saying that investors are nearing complacency.

Some see this as a sign that this is a precursor of a market correction, and that's when we'll see the VIX futures begin to climb. If you're a believer in this notion, you may want to begin accumulating shares of the iPath S&P 500 VIX ST Futures ETN (NYSEARCA:VXX) or its knock-off the ProShares VIX Short-term Futures ETF (NYSEARCA:VIXY).

This would be done to hedge long positions you're holding or to take advantage of the fact that the stock market could have a sudden, short-term pullback that would help justify the onset of QE3 and other Fed intervention mechanisms. For speculators there is also now a VelocityShares Daily 2x VIX ST ETN with the symbol TVIX. It seeks to replicate, net of expenses, the returns of twice (2x) the daily performance of the S&P 500 VIX Short-Term Futures index.

The index was designed to provide investors with exposure to one or more maturities of futures contracts on the VIX, which reflects implied volatility of the S&P 500 index at various points along the volatility forward curve. The ETNs are linked to a multiple (2x) of the daily return of the index and do not represent an investment in the VIX.

If you want to buy some quasi-insurance for some of your stocks or funds that have S&P 500 components in them, you might consider shares or call options in the ProShares UltraShort S&P 500 ETF (NYSEARCA:SDS). SDS seeks daily investment results, before fees and expenses, that correspond to twice the inverse (-2x) of the daily performance of the index.

The fund invests in derivatives that ProShare Advisors believes, in combination, should have similar daily return characteristics as twice the inverse (-2x) of the daily return of the index. So if the S&P 500 were to have a brief 4% pullback before the Federal Reserve makes their next market-saving announcement, supposedly SDS would go up close to 8%.

There's an old, well-founded warning on Wall Street, "Don't bet against the Fed" ... and that's because they control the monetary policies of the government, including how much money to print and the velocity of that money. That's why owning some overlooked stocks right now also makes good sense.

Another choice we have on the long side right now is to choose some of the less appreciated stocks that haven't participated yet in this ongoing August rally.

Natural and organic food products company SunOpta (NASDAQ:STKL) has an out-of-the spotlight profile with excellent potential. At around $5.40, it's selling at a little more than 11 times forward earnings and on August 15 it was upgraded by The Street from a hold to a buy.

Facebook (NASDAQ:FB) hit a new low on Monday, August 20 at $18.75 and may be beginning to form a base that speculators can begin to nibble on this popular and profitable company. Personally I'd wait till the stock has some capitulation selling before buying too much and you might get very lucky and see it hit $16-a-share before retracing its descent back up to higher levels.

Another example of a long position to consider, and one that Warren Buffett's company has been buying, is Phillips 66 (NYSE:PSX), the independent downstream energy company which engages in the oil refining business as well as petroleum's marketing and midstream operations as well as the chemicals businesses. PSX is selling at a current P/E ratio of a little north of 5 and pays a 2% dividend.

More conservative investors might prefer the company that spun-off PSX, none other than ConocoPhillips (NYSE:COP) one of the better bargains among the integrated oil and gas producers. See if you can wait to pick up shares of COP near or below $55 and you'll snag a yield-to-price of nearly 5%.

Don't let fear, greed or any other emotion get in the way of your thoughtful investment plans. The good news about a low VIX and the suppressed "fear indicator" is that it signals that put option premiums are low and that means the big institutional money isn't expecting a major correction any time soon.

Just in case the Fed and the FOMC disappoint the markets again, or some other dramatic news pulls the market averages down for a week, you might consider some hedging choices that will make you some money if the inevitable market slump arrives.

Knowing how to protect your profits using systems like TradeStops and trailing stop losses is another good way to hedge against an increase in stock market volatility. Be prepared and keep your eyes wide open.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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