Volatility and the Markets

01/06/2012 11:42 am EST

Focus: MARKETS

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Forbes' Vahan Janjigian shares his thoughts on what is causing today's high volatility, and also updates his view on the market, giving two of his favorite picks.

Is volatility here to stay? Let’s ask Vahan Janjigian. Vahan, this is like, it’s torture for long-term investors watching this volatility. What’s happening here?

Oh, the volatility has really picked up in the markets, and it’s really scaring the retail investor. Many retail investors are now staying out of the market, which is a very bad thing for markets in general. Volatility has really picked up.

I recently did a study on the rise in volatility just last year alone, starting in January. If you go back to January, there were only three days in which the S&P 500 moved by 1% to 2%—three trading days. No days more than 2%. The rest of the time it was less than 1%.

If you go out to August, there were 14 days in which the market moved by more than 1%, and there was one day in which it actually fell by more than 6%. So 14 out of 23 trading days were pretty big moves.

This rising volatility is scaring everybody. Why is it happening? We’re not really sure, but I certainly have my suspicions.

What do you think?

I think that this computerized high-speed trading is really contributing to the exaggeration in the moves. When the market is falling there are computers all around the country now making trading decisions based on the most recent stock price move, and that’s signaling to them that they should continue selling and selling more.

This is exaggerating both the down side and the up side. In the end it might all be a wash, but for the average retail investor it’s a very scary thing and causing them to stay out of the market.

Is there anynway we can take advantage of this volatility?

Well, there are. There are instruments that you can use to basically bet on rising volatility, but I think it’s a dangerous thing to do because these things change in value very quickly...and you can make some money but you also lose a lot of money doing that.

I wouldn’t recommend that the average investor do that. My recommendation to the average investor is focus on fundamentals, focus on the long term, rebalance your portfolio from time to time, but stick to your asset allocation.

What is your market outlook?

Well, I’m actually a little bit more bullish than I was in the recent past. I had been very bearish on the market for quite some time.

I felt that the rally we had from September 2010 through about March 2011 was fully unjustified. That really kind of scared me and I was advising people to stay out. Of course, the market has come down tremendously since then. I actually think that large sell-offs in the market now present good opportunities to average down and add to your positions.

I’m growing a little bit more bullish, I should say, about some of the economic indicators I’m seeing. In particular, I’ve noticed that the ISM manufacturing index has remained above that critical 50 level, which means that the economy is expanding. Perhaps more importantly, the services index is also above that critical 50 level, and of course services is a bigger part of the economy. Those two things are very good.

I’m also noticing that US exports are increasing, which is always a good thing. Imports are also rising. I actually view that as a good thing too, because it means that demand is starting to rise too. Overall, I’m starting to grow a little bit more bullish on the economy.

Would you be looking at economically sensitive sectors?

You know, I focus more on individual stocks, and I use more of a bottom-up approach rather than a top-down approach, and so there are a number of stocks that I really like.

Such as?

Well, I’m the editor of the Forbes Special Situation Survey, and one of the things I do is I come out with a recommendation every single month.

One stock that I like very much right now that many people are familiar with is Intel (INTC). This is a company that I think, even though it’s so well known and so large, I think it was overlooked.

They have a great dividend yield and their dividend has been growing, and their last earnings release told us that business is actually doing quite well. Their largest sector, which everybody had concerns about, this is the sector that supplies chips for the PC market, that actually picked up very nicely, and that’s a very good sign.

Then on the other end of the spectrum, I’ll give you a smaller-cap stock that I’m also very bullish about is Ross Stores (ROST). It’s a discount apparel retailer.

They’ve actually done quite well through this economic downturn, because they’re pulling in a new demographic. People in the middle class and even the upper class are looking for bargains and shopping at these kinds of stores now, and Ross is doing quite well.

Related Reading:

4 Names to Watch in a Tough Market
How Often Should You Re Balance
The 10 Best Stocks for 2012

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