The month of October tends to be spooky — and I’m not just talking about Halloween. Two of the three biggest monthly swings of the past five years have come during the harvest month:
Click to Enlarge The right approach is a flexible strategy of preparation. Over the years I have found that if I am mentally prepared for more volatility into the autumn, I will be better prepared to react. And instead of hunting for stocks that may be safest in a volatile environment, I make a list of the stocks I want to avoid during such time.
As a general theme during October, I try to avoid stocks with high betas and/or high implied volatility levels in their options.
The VIX volatility index, skewed as it may be due to certain ETFs and structured products, still remains at very low levels. Any move up in the VIX should thus affect higher-beta stocks more.
With that backdrop in place, here are three stocks I will steer clear of this month for trading timeframes of five to 20 days:
Green Mountain Coffee Roasters (NASDAQ:GMCR) has been in the news of late, and the stock — already down almost 50% year to date — remains choppy, volatile and incredibly exposed to headline risk. While the stock’s beta is only 1.15 versus the S&P 500, its options’ implied volatility near 94% is plenty of reason to stay away from the stock during October.
Morgan Stanley (NYSE:MS) has a relatively high beta of 1.68 compared to most of its peers. Granted, a further rally in financial stocks should cause a comparatively larger rally in this stock, but it also works the other way around. Again, given the volatile nature of October, I favor the lower-beta names within each sector.
PulteGroup (NYSE:PHM) has joined the entire homebuilders group on a great run; the SPDR S&P Homebuilders (NYSE:XHB) is up around 48% on the year. Pulte itself is up around 160% year to date and hence potentially overbought after this vertical move. Overbought and oversold conditions can last for extended periods, but what’s more concerning going into a potentially volatile month is the relative increase in volatility for a stock after such a run. The stock’s current beta of 1.78 means that it moves almost twice as much as the S&P 500; a move to the downside out of a sharply uptrending channel could be especially nausea-inducing for long investors.
Unless you are an options player or daytrader, consider staying away from volatile and headline-driven stocks during the month of October. Until the broader indices have regained a better uptrending direction after the recent pause, it should pay to stick with slower-moving stocks.