January marked a vital moment for the markets. And with all the major events taking place, I bet it slipped your attention.
It wasn’t the Swiss unpegging the franc. It wasn’t even that the European Central Bank (ECB) embarked on its own version of quantitative easing (QE) or Apple’s (Nasdaq: AAPL) historic quarter of out-of-this-world profits.
However, this moment will prove to be the most important takeaway from January. And by identifying it today, you can position yourself for the troubling times ahead.
The markets thrive on momentum in either direction, pushing shares higher or sending them lower. It’s the classic battle of bulls and bears on Wall Street.
Since 2009, the bulls have won this fight hands down, but January proves that the bears are making their presence felt. After 18 consecutive months of setting new highs, the market finally got tired and closed January without the S&P 500 reaching any new record highs. Even the wild ride in October managed to close at new highs at the end of the month.
While January has been chalk full of historic events, the only one worth your attention will end up being the S&P 500’s failure to crest a new high.
Let me explain…
An End to the Streak
After the S&P 500 reached a record close in 2007, the markets began a steady meltdown that fed into the 2008 crash. In fact, the markets failed to reach a new high again until March 2013.
Then, just a few months later, the market failed to set a high in June 2013 — likely a sign that momentum was waning and investors were quick to recall the pain of 2008 when the markets topped out just months after reaching all-time highs.
But then the S&P 500 was back to setting new highs in July of 2013 as investors’ worries faded — up until last month.
By failing to close at a new high, it marks an end to a historic pace for the S&P 500 — 18 consecutive months with a new high.
What does this mean going forward? Expect volatility.
The battle between the bulls and bears of the market is just getting started. Look for them to cause violent swings, which will happen more frequently and be larger than previous years.
The bulls and bears will pull and tug on each piece of information as it comes available. Whether it’s preliminary GDP data or a statement from the Fed … there will be volatility. Don’t forget that we’re also wading through ongoing sanctions against Russia, economic growth concerns in Europe and low oil prices that are disrupting the market.
Volatility can create difficult trading times because it’s nearly impossible to time these violent market swings. But there are steps you can take to stabilize these volatile times.
Lower Volatility Exposure for Strong Potential Gains
One easy way is to hold stocks that are less volatile compared to the rest of the market. These securities tend to move less when markets get volatile, but they still benefit from the overall rally.
Fortunately, there is an exchange-traded fund (ETF) for that — PowerShares S&P 500 Low Volatility Portfolio (SPLV).
This ETF tracks low-volatility stocks in the S&P 500 and does a good job of reducing volatility.
Take the wild market ride of October, for example. In the middle of October, the S&P 500 Volatility Index (VIX) had spiked more than 100% in just two weeks. Naturally, investors were panicking.
Had you bought this ETF on September 1, you would have been sitting with a 2.7% loss at the bottom in October, while the S&P 500 suffered a 7.3% loss.
At the end of October, SPLV was up 4% and the S&P 500 was up a mere 0.4%.
Clearly this low-volatility ETF works in times of spiking volatility.
Not only do you get a bit of a cushion as we approach volatile times ahead, but you also pick up a modest 2.2% dividend yield, which currently tops the average 1.98% that the S&P 500 yields and the 1.7% a 10-year Treasury yields at the moment.
Let me say that I don’t believe the bottom is falling out on stocks today. But January’s shortcoming signals volatile times ahead.
Editor, Pure Income