What to Buy and Sell in a Dynamic Market

Oops, scratch that — oil apparently doesn’t matter anymore. Early last week, investors fled stocks, fearing that the collapse in oil prices might be signaling a slowdown in the global economy.

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But everything turned around Wednesday after a small drop in eurozone consumer prices (0.2% year-over-year for December) convinced the crowd that the European Central Bank may soon be forced to rev up its monetary printing presses again.

The rally rolled on Thursday, with the S&P 500 erasing all its losses since Dec. 31.

Folks, we’re in a market where almost anything can happen from day to day. Bad news can be good news for stocks — or not. Good news (like today’s 4,000 drop in jobless claims for the week ended Jan. 3) can be taken favorably, as it was last week, or investors can interpret it as an unwelcome sign that the Federal Reserve is about to tighten credit.

It all depends on the prevailing mood.

While I’m as pleased as anybody with the nice bounce we’ve had over the past two sessions, I’m wary of the market’s growing capriciousness. Should energy stocks, as tracked by the Energy Select Sector SPDR (ETF) (XLE), really gain 2.2% on a day when the price of crude barely budges?

These increasingly unpredictable and even whimsical swings may be hinting at greater instability later on. I’m not particularly worried about the immediate future. (Right now, we’re in what is historically the strongest phase, for the stock market, of the four-year political cycle.)

Looking down the road, though, especially to the May-August stretch, when the Fed may enact its first rate hike, I see potential for mischief. Don’t be surprised if we dust off some of our long-dormant hedging tactics (bear funds, put options, short sales) in coming weeks and months.

Meanwhile, I suggest playing both sides of the Street.

It’s okay to keep buying blue-chip stocks with generous dividends, such as HSBC Holdings plc (ADR) (HSBC) and Nestle (NSRGY). I expect Nestle to announce its customary annual dividend hike sometime in February, lifting the yield (on Wednesday’s price) comfortably above 3%.

On the sell side, I recommend exiting Cohen & Steers Infrastructure Fund Inc (UTF), a closed-end fund that focuses on utilities. UTF has performed well over the years, racking up a 128% total return since February 2006.

However, utility stocks are now quite expensive, and UTF has begun to lag its peers over the past 12 months. What’s more, UTF uses borrowed money (leverage) in an effort to enhance returns.

If interest rates were to rise, driving utility shares down, UTF would likely suffer more than an unleveraged utility fund or a typical utility stock. In 2008, UTF dropped a screaming 52.7%, including re-invested dividends.

Let’s toast our good fortune and kiss UTF good-bye.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.


Article printed from InvestorPlace Media, https://investorplace.com/2015/01/oil-hsbc-nestle-utf/.

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