Volatility Rises Sharply As Selling Intensifies!

We predicted last week would see a rise in volatility and sure enough the VIX skyrocketed to 28. Investors got spooked and sold whatever news there was, good or bad. By the end of the week, the market experienced its second straight weekly decline, a market drop of -3.9%. That is the largest weekly decline since March of last year. What happened? Certainly, some of the volatility can be attributed to concerns over the anticipated onslaught of quarterly earnings reports, now in full swing. But the surprising result was that the vast majority of earnings reports released were positive! Our data indicates that 47 out of 60 companies reported upside results – that is an overwhelming success rate that does not explain market declines. Other the other hand, perhaps investors were spooked by concerns over additional financial regulation proposed by Obama and questions over whether Bernanke would be confirmed for a second term as Fed Chairman. There were also concerns that China may begin tightening monetary policy which could reduce US investment and growth. All in all, the sell off appears a little overblown. In terms of the longer term view, we give the most weight and credibility to the strength of quarterly earnings reports and that has been overwhelmingly positive. However, we need to add caution here. Markets move down much faster than they go up, and fear can drive the market wildly over short periods. In other words, we think the market will return to previous levels, but the next week or so could be very volatile.

Momentum And Value Screen: Hot Stocks To Buy

What Stock Tips do we have? VSE Corp (VSEC, Business Services) and Continucare (CNU, Healthcare Facilities) are still on our watch list even though both are up significantly since added, at 43% and 20% respectively. We plan to wait for the quarterly earnings report from each company before we consider investing. VSEC earnings are due out next week and CNU the week after, February 1. We added American Italian Pasta (AIPC, Food Processing) to our list last week and we still like this one particularly for diversification purposes. AIPC stock ended the recent week essentially flat, a great showing in light of the -3.9% market downturn. We dropped CNC from our watch list after the company announced plans for a stock offering that would be dilutive to existing shareholders. That could pressure CNC stock price performance for some time to come and we would rather turn our attention to better investment alternatives. We have two new stock additions for our watch list that include International Power PLC (IPRPY, Electric Utilities) and Lihua International (LIWA, Misc. Fabricated Products). International Power is engaged in the generation of electricity and provision of electrical capacity in 21 countries. IPRPY stock has been on a steady uptrend since July 2009 and we think that momentum will continue. It operates across a number of countries and should benefit from increasing demand as economies begin to improve. Lihua is a copper clad aluminum magnet wire producer in China. The company sells its products mostly in China and the magnet wire is a basic building block for a range of motorized appliances. The game here is that strong growth in industrial and consumer demand in China will continue at a pace likely faster than most other countries, driving profitability for the company. The price appreciation on LIWA could get an added boost as more institutional investors uncover it, as institutional ownerships is currently very low under 11%. As for the market, volatility increased remarkably in just three days as the market fell -3.9% for the week. That is a big change in sentiment, and a little scary considering that the earnings news from last week was significantly more positive than negative. We think market fears became exaggerated, but would add it is difficult to guess when those fears will subside. Markets go down faster than they rise and we plan to be prudent and sit tight for a few days to see whether the sharp declines continue or whether the market bounces back. We remain cautiously optimistic over the long term. However, the volatility increase will provide trading opportunities for options. In fact, we made several trades last week which we discuss in our Aggressive Portfolio update. Option premiums will rise with volatility and that makes income producing strategies more appealing.

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