While New York is currently sweating through brutally high temperatures, activity on Wall Street has cooled down a bit as the Dow closed 100 points higher today. Even so, there’s no doubt that summertime volatility has arrived on Wall Street. A month ago at this time, the VIX, which is one of the most widely followed gauges of volatility, was at 14. In the early selling on Monday, it reached nearly 22, nearly a 50% increase over the last few weeks.
The main reason for the choppiness the last few days was of course, was the Fed’s news last week about possibly cutting back on quantitative easing. I discussed this in the blog on Wednesday. So now that volatility has arrived (and is probably here to stay), I recommend that you hold true to the instructions I outline in my five-step survival guide for summer choppiness. Because some of the trends that I predicted would occur are already starting to emerge.
For example, Tuesday’s rebound has uncovered which stocks are quick to recover from selloffs and which will continue to sink. As I mentioned earlier, good stocks (rated A or B in Portfolio Grader) are like fresh tennis balls—they can’t avoid market selloffs, but they bounce back quickly and with force. As an example I’ve pulled these highly-ranked stocks from Portfolio Grader: Adobe Systems (ADBE), Aetna (AET), Cigna (CI), M&T Bank (MTB) and WellPoint (WLP):
Meanwhile, D and F rated stocks are oftentimes the first to fall and the last to recover, like Cliff Natural Resources (CLF), J.C. Penney (JCP), Newmont Mining (NEM), Oracle (ORCL) and Teradata (TDC):
When you look up each stock’s performance over the past five days, the difference is clear:
The A- and B-rated stocks bounce like tennis balls while the D- and F-rated stocks have plunged with the market—and then some!
I’ve said it before and I’ll say it again: Sell-offs will expose weaknesses in your portfolio. Use your knowledge of which stocks were hurt the worst to trim your holdings in one area and increase your exposure in another.
And during times like this, using a stock screening tool like Portfolio Grader can save you a lot of heartache. But in the end, the lessons you learn during each boom and decline will make you a better investor and help you reach your financial goals.