Need definitive proof that the financial industry is on the mend?
Are you worried that increased volatility spells doom for this aging bull market?
Or are you spooked by the fact that the “Fab Five” momentum stocks are rolling over?
We address all these concerns – along with a few primo choices to (safely) juice your yields in this zero-interest world – in this week’s Friday Charts edition.
So let’s get to it…
The Truth About Volatility
There’s no question that momentum reigned in 2013.
Pullbacks were sparse. And when they did materialize, investors were quick to step in and buy.
It was also common for investors to chase the rallies with even more buying.
In short, the market conditions couldn’t have been more ideal.
Now that we’re three months into 2014, though, the same can’t exactly be said.
Sure, investors are still confident enough to buy the dips. But their conviction isn’t as strong. And that’s leading to much more volatility.
As I mentioned to WSD Insiders on Monday, we’ve already witnessed 22 triple-digit-point moves in the Dow this year, compared to only nine at the same point last year, according to Ryan Detrick, Senior Technical Strategist at Schaeffer’s Investment Research.
So the easy ride higher is over. But does that mean the bull market itself is on its deathbed? Not necessarily.
Volatility – represented by the CBOE Volatility Index (VIX) – and stocks traditionally move in opposite directions. But not always.
“I believe we may be entering a period similar to the mid to late 1990s, when the stock market and volatility both rose for an extended period,” says Charles Schwab’s Liz Ann Sonders.
Time will tell if Sonders is right. Combine the chart with her list of 17 similarities between now and the 1990s, and she definitely gives us some food for thought.
Introducing the New “Fab Five”
Given that we’re in the thick of the NCAA Basketball tournament (Go Gators!), I couldn’t resist drawing this parallel…
Just like the Fab Five at the University of Michigan were dismal when it really counted, it looks like the Fab Five of the stock market – Netflix (NFLX), Facebook (FB), Google (GOOG), Priceline (PCLN) and Tesla (TSLA) – might be blowing it, too.
Over the last week, shares of 2013’s highest-fliers have been taking it on the chin, dropping by double digits in some cases, while the S&P 500 has pretty much traded flat.
What gives? As Yahoo Finance’s Jeff Macke explains, “I can tick through individual reasons for all of the above stock drops, but that would ignore the more obvious fact… Investors are running away from high-flying tech momentum names. Risk aversion is in vogue.”
Don’t say I didn’t warn you. Much more downside lies ahead for these overhyped and overvalued firms, particularly Netflix, Facebook and Tesla.
Rise of the Financials
Now, if you need proof that the financial industry is on the mend, look no further than Wells Fargo (WFC).
The stock has been on a tear ever since the market bottomed in 2009, rising nearly 250%.
If shares climb a tad more and hit $51, the San Francisco-based company will become the largest U.S. bank ever, based on market capitalization.
Clearly, the financial sector has recovered. And then some.
Starved for Yield?
Higher interest rates are coming! Higher interest rates are coming!
But not until 2015, based on newly minted Fed Chairman, Janet Yellen’s, latest comments.
That means we’ve got at least another year of scouring the earth to find respectable yields.
Of course, this isn’t a new challenge. We’ve been faced with record-low yields on traditional income investments, like U.S. Treasury bonds, for years. But it’s a challenge, nonetheless.
My suggestion? Don’t ratchet up your risk tolerance and go “all in” on the highest-yielding investments you can find.
Instead, be responsible and consider adding some alternative income investments to your portfolio. Alternatives like MLPs, preferred stocks, emerging market debt, bank loans, even U.S. REITs.
As the chart below reveals, they offer compelling yields with the potential to build wealth and outpace inflation.
The best place to find such ideas? I thought you’d never ask! Check out articles from my colleagues, Alan Gula and Richard Robinson, over at our sister publication, Dividends & Income Daily.
That’s it for this week. Before you go, though, let us know what you think of this weekly column – or any of our recent work at Wall Street Daily – by going here.
Ahead of the tape,