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Volatility rattles even
seasoned investors, but
poses opportunities
NEW YORK » Wall Street's recent decline has been an unsettling reminder of the three-year bear market, and with terrorism rattling investors, gas prices soaring and job creation stagnant, many observers worry that the correction is not over yet.
Even if it isn't, though, analysts say all this confusion may hold buying opportunities.
The market's latest volatility has been unnerving even for professional investors. A ferocious decline on Monday was followed by two days of sideways trading, and then a dazzling rebound erased nearly all the week's losses Thursday. After yesterday's modest moves, only the Standard & Poor's 500 was fractionally lower for the week.
In the lull between quarterly earnings and without significant economic news, it's not surprising that the market should be a bit moody. But there are an unusual number of factors feeding the current volatility, including anxiety over when the Federal Reserve will raise interest rates, who will win the presidential election, and whether the outcome will change the present business-friendly climate.
"We're in a market that is going to be much more complicated and difficult, with bigger moves up and down, and that may persist even up to the election," said Woody Dorsey, president of Market Semiotics, a financial forecasting firm in Castleton, Vt.
Coming on the heels of a steady upward trek, all this change is making a lot of investors uncomfortable, said Dorsey, the author of "Behavioral Trading," a book that examines how investor confidence and expectations affect market trends.
How you deal with it depends on your own tolerance for risk. If you find the market confusing, it's perfectly all right to not to make additional investments at this point. If you're more aggressive, you can monitor the short-term declines for opportunities to put your money to work.
"You can be more of a picker and a chooser than part of the herd," Dorsey said. "The market is like Bloomingdale's. Two, three times a year, things go on sale, and that's when you buy. And why wouldn't you?"
If you're socking money away regularly in your retirement account, a strategy known as dollar-cost averaging, you might just want to tune out. "Don't look at financial TV all the day. Just don't," said Theodore L. Parrish, co-portfolio manager for the Henssler Equity Fund, a large blend based in Atlanta.
For a long-term investor, the correction should be "a non-event," Parrish said. Buying high-value stocks at good prices, and sticking with your strategy, even when things don't appear to be going your way, is far more important than day-to-day volatility.
"A buy-and-hold investor needs to be careful, and by that I mean they need to buy quality," Parrish said. "If the market does go down because of a big terrorism attack or a recession, you want to own a company that is financially strong enough to weather it. That's our philosophy. It seems boring at times, but we don't care."
To screen out unproven stocks, the Henssler fund only buys companies that get an A rating for financial strength from Value Line and an A-minus or better for earnings and dividend quality from Standard & Poor's. Lately, Parrish has been looking for values in the health care and financial sectors, and he's even picked up some techs.
"There are just a ton of companies that look decent in this market," Parrish said. "These are companies that are going to play on an expanding global economy, and they also have defensive qualities."
Wendell Perkins, director of equities at the Johnson Family of Funds in Racine, Wis., also likes health care and consumer staples, because they tend to be defensive. But nervousness about rising interest rates has led him to cut exposure to more economically sensitive areas -- financial stocks, utilities, and real estate investment trusts.
And notwithstanding the 2.2 percent drop in the Nasdaq composite index since the start of the year, he finds most tech stocks still too pricey.
"There are stock-by-stock opportunities," Perkins said. "But it's a very emotional market. You may continue to see these rallies and sell-offs ... and in the end it's possible we might not get very far. We could just come out even."
The Dow Jones industrials ended the week up 26.37, or 0.3 percent, finishing at 10,212.97. The Standard & Poor's 500 index lost 1.75, or 0.2 percent, to close at 1,108.06.
The Nasdaq rose 19.55, or 1.0 percent, closing at 1,960.02.
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