For the past few months—just like investors all over the world—the Cabot analysts and editors have been discussing this long bull market, stock valuations and the potential for further stock market volatility.
We’ve been carefully monitoring the behavior of sectors, advances/declines, and options action, as well as more fundamental parameters like purchases and sales by institutions and company insiders, searching for signs of a bottom or the potential for a deeper correction.
And while none of us claim to be market predictors, we’ve all been investing for many years, and have lived—and profited—through lots of market cycles. Consequently, we’ve learned that money can be made in good and bad markets, and most certainly, during periods of stock market volatility.
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Anyone looking at the following chart can be very thankful for this long bull market and all the opportunities for profit that we’ve taken. But—while we make no market forecasts—it’s clear that the market is choppy and sentiment is turning south; investors need to exercise some caution in order to hold onto existing gains and recognize the opportunity for new profits.
I’d like to offer a few “tried and true” strategies that have paid off over the years.
Bottom line, I think the most important line of attack during stock market volatility is this: Buy fundamentally strong stocks that:
- Are undervalued in relation to their peers
- Have excellent cash flow, with most of it derived from their primary business
- Are not burdened by too much debt, so they remain flexible in seeking new opportunities
- Have more buyers than sellers, creating momentum in their share prices
- Enjoy rising moving averages.
Second, I look for companies that have strong catalysts that are likely to boost share prices, including:
- Insider/institutional buying
- Analyst upgrades/initiations
- Operate in an industry with lots of mergers & acquisitions, and who may be a prime candidate for a buyout
- Spin-offs, which can cause both the parent and spun-off prices to rise
- Stock buybacks, which while usually temporary, can give a lift to prices
- Special dividends, which often boost prices, but offer the second benefit of increasing your gains
- Evidence of a turnaround, with long-term earnings and revenue implications
- Earnings and revenue triggers, such as new product lines, drug discoveries, rising market share, etc.
Once you fill your portfolio with stocks that have great potential, be sure your holdings are diversified by Market Cap and Industry, set your mental or actual stop losses to protect your profits, and remain disciplined in your buying and selling approach.
One last thought that may help you in this period of higher stock market volatility. Research indicates that historically, the following sectors have been the winners during bear markets. I don’t think you’ll be surprised to see that they are primarily what analysts call “defensive industries.” It may be a good tactic to add a few to your portfolio on the down days—just in case high stock market volatility continues.
- Soft drinks companies
- Major pharmaceutical companies
- Food producers
- Major oil companies
- Basic household products companies
- Incumbent telephone companies
- Tobacco manufacturers
- Electric utilities
Have you considered taking a more defensive stance in your portfolio given the high stock market volatility?
Nancy Zambell has spent 30 years educating and helping individual investors navigate the minefields of the financial industry. As a lecturer and educator, Nancy has led seminars for individual investors at the National Association of Investors, Investment Expo and the Money Show. She has also taught finance, economics and banking at the college level, and has been quoted extensively in The Wall Street Journal, Investor’s Business Daily, USA Today, and BusinessWeek. Now let her give you the tools and resources, including a monthly magazine, for gaining the peace-of-mind to live comfortably now and in retirement in her Cabot Money Club.Learn More >>
*This post has been updated from a previously published version.