STRATEGIES

Clock Is Ticking on 3 Year-End Crises

Europe's mess, the US fiscal cliff, and China's economy will produce plenty of volatility as 2012 winds to a close. Here's what I expect, and how to take advantage of the uncertainty, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

So many moving parts for the end of 2012: China's economic acceleration (maybe), Europe's economic deceleration and continuing debt crisis (certainly), and the US "fiscal cliff" and stubbornly slow economic recovery.

Each by itself could change the direction of the financial markets. In combination, they could cancel each other out…or multiply their individual powers.

I think we're likely to see lots of volatility—much of it to the downside. Days that have the smell of investor panic—like Wednesday, when nine stocks fell for every one that rose on the New York Stock Exchange. And we'll see swings from endless worry (like now) to unjustified optimism (give it two weeks).

Let me share a strategy for navigating your way through this maelstrom, and a crisis-by-crisis timeline.

Ready to Move
The strategy (or maybe strategies) I'm trying to follow in this period is one I've advocated before as a way to deal with the extraordinary volatility that comes with the market these days. It builds on the idea of opportunity costs. And it involves selling stocks that look as if they're going to need more than six months to see their upside.

I may like these stocks for the long run, but the opportunity cost of sitting in dead money is too high. That's because I'd like to have some cash so if a great stock I've had my eye on for months (or years) suddenly gets cheap, I'll be able to buy it.

During this period, I'd like to raise my cash for those opportunities not by selling my strongest stocks—that's always a temptation during periods of volatility, when the strongest stocks are the only ones you can sell without a big loss—but by selling those where the potential payoff is furthest away.

What stocks do I want to buy? Those few that never seem to go down, except when the market is really, really in a downtrend. (Take a look at a chart of Middleby (MIDD) since August to see what I mean.)

Stocks that have been knocked down so far in a selling swing that they're now bargains on even near-term prospects. Stocks that could break big to the upside in early 2013 if—as I think likely—growth in China and in the United States turns out to be not exactly strong, but stronger than expected.

Yes, those are ideas that I've recommended before (along with the idea of buying dividend stocks if volatility knocks down the price enough to produce a 5% yield). And they've worked in other periods of volatility this year. Wash, rinse, spin, repeat.

In this column, I'm going to lay out my best guess at timetables for the three big macroeconomic, market-moving events—and suggest how they might fit together. The goal is to give you a road map to the news that will drive market emotions. And then I'll give specific examples to give you an idea of what to pursue and what to shed during this end-of-the year mayhem.

Let's begin with what I call my "timeline to disaster." You can start with any event you chose. Me? I like to start with Europe.

Tickers Mentioned: Tickers: MIDD, PCP, AUY, ASML, AAPL