Volatility Returns

There are several reasons that volatility has returned to the stock market.  Gridlock between Congress and the President is one reason. Europe is still in bad shape, too.  Another reason involves major stock indexes reaching high points of the past, and there is not much gas left to push stocks higher.  Finally, we have a number of technical indicators showing volatility in the near future.

The New York Stock Exchange Summation Index, $NYSI, is in a downtrend.  The inverse volatility index ETF, XIV, is showing extreme levels of volume, and this is further proof that a downtrend is coming.  Then, TLT, the long-term government bond ETF, has started on uptrend, and TLT goes opposite from stocks.

These charts are from Google Finance.  Double-click on the charts to expand them for better viewing.  I believe the best course of action is to reduce your current long stock positions and buy TLT because I think it can go to $130 per share or more over the next few months.

Stock Market Direction

As of January 25, 2013, it looked like the stock market was overbought and due for a pullback.  The yield on ten-year treasury bonds was $1.98 which signifies a lack of interest in bonds, and this occurs at stock market tops.  The New York stock exchange bullish percent, $BPNYA, was also showing overbought.

Of course, the stock market can stay overbought for a lot longer than you think sometimes.  Also, there is not really any bad news to bring down the market since Congress and the President have deferred their budget battle until May.  If there is a pullback soon, it may be wise to buy UDOW, the triple Dow ETF, because this is the best time of the year to own stocks.  We could possibly go a lot higher before May if we have a correction sometime in the next month or two.

Stock Market Downtrend Is Over

Several stock market indicators turned positive during the week of November 12-16.  First, the President and Congress showed a willingness to cooperate in solving the nation's budget crisis.  Secondly, this is the fall rally season.  Downturns seldom last for long in the fall as opposed to the extensive May selloffs and summer blues.

Another important indicator was the NYSE McClellan Oscillator.  It briefly went below -80 during the week and then immediately turned upward.  This scenario nearly always turns into a significant rally.  It is time to sell short stocks like TZA and buy long stocks like UDOW.  

Another point to make concerning an imminent uptrend is the action of UDOW.  Even though the stock price is at a low point, the RSI and MACD have both turned upward.  This divergence is an early signal of a trend change.  This new rally will probably last several weeks unless some bad world news shortens the trend.

Stocks Will Rebound

The stock market fell hard after the election.  Several reasons have been given for the downturn, but it probably will not last.  For example, the looming budget crisis was one reason that pundits gave for falling stock prices.  We had this same situation in August of 2011, and Congress eventually compromised.  I believe Congress and the President will agree on a solution once again, and stocks will move higher.

We just completed an uptrend cycle that ran from July to October.  Stocks have already pulled back almost to the 50% Fibonacci retracement for this trend.  As long as the Federal Reserve is willing to prop up the economy, I believe buyers will soon look for bargains at the current level or slightly lower.

Another reason for a stock rebound is that the economy is still slowly recovering.  Unemployment is staying about the same, manufacturing is not plunging, and home-building is looking up.  So, it makes sense to keep some money in stocks for the usual fall and winter rally.  You could also diversify into bond funds and get paid for waiting.

Fall Rally Stocks

The fall rally in stocks has started early this year since Ben Bernanke has implied QE3 is coming and Mario Draghi, the ECB president, has made good so far on his promise to save the euro.  Since volatility is almost nothing, XIV has risen dramatically since it is the inverse VIX exchange traded fund.  It is a good time to buy  XIV because the fall rally will probably continue for a few more months at least.

Another good stock to own is Google (GOOG).  The stock has increased more than 40% in the past year, and Google just keeps coming up with more ways to make money.  It will probably be safe to own Google as long as the fall rally continues.  Supposedly, the stock market is due for a fall in 2013.  You could monitor Google to decipher when you should exit stocks.  Just go to Yahoo Finance and look at the chart of Google.  Then, add the 9 day and 50 day simple moving average technical lines to the chart.  When the 9 day moving average line falls below the 50 day line, you should sell Google and play defensively in cash or TLT, the 20 year bond ETF.  TLT will go up when stocks go down.  

Two Stocks To Own For 100% Gain

The stock market doesn't know whether to go up or down right now.  The news is not bad enough for a big downturn and not exciting enough for a real bull rally.  Under these conditions, though, you can still make money on two stocks if you are patient.

The first stock to buy is NUGT, the triple gold miners ETF, whenever it is selling for less than $9 per share.  It will typically be at that low point whenever the stock market in general has pulled back.  Then, be certain to sell the stock whenever it reaches $13 per share for almost a 50% gain.  NUGT will most likely reach $13 during several bull rallies over a year's time.  If you just catch two of these cycles, you will make around 100% for your money.

A second stock that has predictable annual cycles is TLT, the 20 year treasury bond ETF.  People and institutions will run to treasury bonds whenever they have no faith in the stock market.  You could buy TLT for $110 per share when the stock market is at a winter high in March.  Then, just calmly wait for a May selloff that will eventually run the price of TLT up to around $130.  Sell TLT at that point for an 18% gain.

So, owning these two stocks at various times during the year will most likely net you more than 100% for your money if you are patient.  You don't really have to be in the stock market all of the time to make money.  Just be sure you are in the right stocks at the right time.  Then, sit on you hands the rest of the year to make sure you don't lose the money you have gained.
 

Monthly Dividends With Capital Gains

One of the great things about investing is that you can own fairly safe stocks while getting a paycheck from those companies every month.  One such company has the ticker symbol of O, Realty Income.  They pay 4.3% annually in monthly installments, and the stock has grown by around 33% in the past year.  Realty Income is one of the best companies in the world for getting superb dividends and capital gains at the same time.

Another amazing monthly payout company is TLT, Barclays 20 Year Treasury Bond Fund.  TLT is part of the iShares group of fixed income, U.S. government stocks.  The dividend is only 2.5% each year, but the stock has grown more than 20% in the past year.  Gaining 20% or more each year is an investor's dream.  Some people think we are in a bond bubble, but I believe TLT can continue to grow.  The Federal Reserve has stated that interest rates will probably stay low for the next two years, and they are also actively buying U.S. bonds.  We also have a lot of investors and institutions who prefer the safety of bonds, and they have no desire to own a lot of stocks.

Thus, buying O and TLT now may be one of the best things you have ever done.  The stock market has lost a lot of steam lately, but good dividend stocks will continue to flourish.  You will also get a bit of cheer every month when you see the payout from these two stocks in your investment account.  Just be certain to sell the stocks if they drop 10% or more to protect your capital.  You can always buy them back later.