In its latest Beige Book survey, the Federal Reserve threw around the words “modest” and “moderate” to describe the U.S. recovery. But while slow and steady may be the pace on Main Street, it’s a completely different story on Wall Street. As we saw by Tuesday’s rebound and Wednesday’s nearly 200 point plunge in the Dow, “volatility” is increasingly becoming the buzz word of choice.
There’s plenty of anxiety to go around, what with the lackluster ADP (ADP) report and lingering speculation about the Federal Reserve’s monetary policies. But if you can cut through the hype and kneejerk reactions, there is actually good news.
Believe it or not, this is a healthy kind of correction because money is not coming out of the market but simply rotating into other investments. What’s happening is that there’s an internal rotation in the market. Last month’s winners have become this month’s losers and vice versa.
So the key to profiting in this market is understanding which stocks are taking a breather thanks to general anxiety and which stocks are truly sunk.
For example, in May, some of the big losers were high dividend yielding stocks. That’s because Treasury bond yields rose 0.5%, causing risk adverse investors to flee interest rate sensitive stocks. That’s not to say that you should avoid dividend stocks wholesale. In fact, I’ve isolated a number of high-quality, high-yielding stocks that are tremendous buys on this latest pullback. I plan to release these names on the blog in the coming days.
Meanwhile, there are areas that you should now avoid. For one, the relatively strong U.S. dollar is pinching the overseas profits of multinational companies. 40% of the S&P 500’s sales are outside the U.S. So if you’re investing in blue chip stocks, I recommend that you avoid multinationals and stick to domestic bets.
As volatility continues to pick up, I’ll be with you. With the changing times comes new buying (and selling) opportunities, so stay tuned.