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Amid Market Slump, Boring Might Be Back

18 April 2013 in Trading Ideas

Put those predictions of Dow 20,000 on hold for the moment – the bear may no longer hibernating.

After pushing past pre-financial crisis highs set nearly six years ago, stocks have returned to looking mortal again. Just like that, the S&P 500 slipped nearly 3% in the past week, as of Wednesday’s close.

And look at Apple – the former “can’t-miss” darling of investors that saw its shares rise nearly ten-fold in less than four years. Now, the stock is in full retreat, dropping below $400 for the first time since late 2011, having slid nearly 25% already in 2013.

What’s more – the jittery nature of investors is evidenced by a rising volatility index. On Wednesday, the VIX once again jumped over its 200-day moving average for the second time in three sessions.

In addition, for the first time since late February, the Dow Jones Industrial Average put together three triple-digit moves in a row.

These kind of market swings can understandably make equity investors a little queasy about the future, especially when many analysts are pointing to the uneven earnings performances disclosed this week by blue-chip companies.

What’s an investor to do? For many, this may signal a time to get defensive – or to get more defensive. That can mean broadening your portfolio to include sectors that are traditionally less impacted by economic swings. We’re talking healthcare, utilities and consumer-staples stocks, which, coincidentally have been the strongest sectors in 2013.1

Stable Earnings MotifAnother option is to zero in on companies that have shown a tendency to put up stable profit performances quarter after quarter – regardless of milder economic swings. One alternative for that mindset is the Stable Earnings motif, a portfolio of 20 stocks of companies that have shown the ability to grow their annual profit by at least 3% over the past five years – and with small earnings variability ratios.

The motif has gained 7.8% so far in 2013, and is up 15.1% in the past 12 months.

In times of rising volatility, the opportunity to make profitable investments is never boring.

1Jonathan Cheng, “Dow Finishes With Triple-Digit Drop,” WSJ.com, April 17, 2013.