Stocks Will Remain Volatile, So Prepare To Take Advantage

by: Dana Blankenhorn


Volatility tends to rise in political years. This one will be no exception.

Raising cash as markets rise is painful, but profitable.

Get your lists ready.

The words given the late Bette Davis in All About Eve well describe the market of the last year and how things will be at least for the next six months.

A bumpy night is an easy prediction to make. Twice in the last year - in August and January - the stock market fell hard. Both times it recovered. Those who held their nerve and bought near the bottom did very well indeed.

This is going to happen again. There could be any number of precipitous events:

  • Job growth may slow further. Today's number of 160,000 could get follow through.
  • Donald Trump may seem to be winning. That's going to cause some stocks to plunge.
  • Hillary Clinton may seem to be winning. That could also cause some stocks to plunge.
  • War could break out, or peace. More likely, one or the other will appear to.

Add to that the possibility of foreign markets cratering or environmental disasters and you have a highly combustible mix.

This is a great thing for traders. Traders like action, they crave it, and they only have something worth complaining about when stocks are not moving. They will move.

It can also be a good thing for small investors. Assuming, that is, you raise cash in the good times so you can sell in the bad.

The August plunge took 2,000 points off the Dow Jones average. The January plunge, while less abrupt, did the same. The highs of last month exceeded those following the August plunge, but were still below the records set in the spring of 2015. Now, in about a week, we have lost 400 Dow points. The NASDAQ shows the same pattern, only with lower highs at each peak than before. The S&P's performance was similar, the recent high of 2100 falling just short of the previous peak's 2014 and the 2028 achieved in the previous peak.

Now chartists are going to call this bearish, a pattern of lower highs and lower lows. The bull market is now over seven years old, and the economic recovery has been going on since 2010. We are due for a pause.

But here is my point. We are not due for a crash.

We have had two major crashes this century. The first followed the speculation of the dot-com bubble. The second came with the collapse of the banks in 2008. Both these collapses were man-made. They were not caused by any change in the underlying trajectory of the economy. Lazy investors who held on through both of them are now ahead.

Just one thing. You need to have cash on hand to take advantage. This can be hard to do. When your stocks are rising, it's easy to let them ride. This leaves you caught out when stocks go back to their lows.

Cash makes no money. It loses money, thanks to inflation. In non-volatile times, it makes sense to have very little cash. But I have learned my lesson. I've got almost 10% of my current portfolio in cash, waiting for the sound of the panicking herd, waiting for predictions of doom and gloom to appear to come true.

What to buy? We all have our lists. My list is heavy on technology, because the underlying trend of my entire lifetime is toward technology-driven change. So when it falls I will be getting some Facebook (NASDAQ:FB), nibbling on Google (NASDAQ:GOOG) (NASDAQ:GOOGL), and cringing over the value of my (NASDAQ:AMZN). I might get some McDonald's (NYSE:MCD) because I already have Starbucks (NASDAQ:SBUX). I like healthcare stocks such as Centene (NYSE:CNC) that make money from managed care, and biotechs like Regeneron (NASDAQ:REGN) focused on drug discovery methods rather than merely compounds.

What's on your list?

Disclosure: I am/we are long AMZN, GOOGL, SBUX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.