The Anna Maria Island Sun Newspaper

Vol. 10 No. 41 - July 14, 2010


Anna Maria Island Sun News Story

Investors buffeted by bad news and volatile markets

Investment Corner

Judging from the tones in people’s voices and their investment related decision making, I would dare say we are experiencing a general wave of pessimism close to what we experienced in the spring of 2009. This is interesting because although the economic news certainly isn’t good yet, it is nowhere as bad as what we faced about 15 months ago.

This is the third column in the last two months I’ve devoted to a review of current investor skittishness, with the purpose being to try to help you see the forest without too many trees getting in the way. Some recent articles in the financial press have prompted my continued coverage of this issue. No one knows where short-term, news driven trends will take us in the next week or two, but the longer term lessons appear more reliable and actionable for the individual investor.

Mark Hulbert, of the Hulbert Financial Digest, has monitored the consensus opinion of investment newsletter writers since 1980. Like with individual investor surveys, the majority view (bullish or bearish) of these newsletter writers tends to be wrong at major market turning points. Mr. Hulbert’s observation published on July 6, is that the level of bearish (negative) sentiment among both individual investors and investment newsletter writers is at the highest level since March of 2009 – the maximum point of fear in the financial crisis.

Of course, the point is that this extreme negative view may translate into a positive for the trends in the stock market in the next few months. Mr. Hulbert claims that the predictive value of these extremes in positive and negative opinions extend out to about three months.

Investors also appear to be continuing to zig when they should be zagging, and vice versa. The news of the fiscal woes in the European Union made headlines over the last few months, but just as investors began to wonder about the future of Europe, stocks there have outperformed their counterparts here in the U.S. by a pretty good margin in the last couple months and the Euro has actually gained strength against the U.S. dollar recently.

As if investing in the stock market isn’t hard enough, we now have easy to access vehicles for trying to make money on the volatility of the stock market. One of these is an exchange traded fund (ETF) from iShares called the iPath S&P 500 VIX Mid-Term Futures exchange traded note. This note which trades as easily as a stock under the symbol of VXZ moves up and down as the volatility of the stock market increases or decreases.

On June 30, VXZ took in $128 million of new assets, according to a recent article in the Wall Street Journal by Mr. Jason Zweig, representing growth in the fund’s assets of 25 percent in one day! A quick check shows the fund’s price had already risen over 17 percent in the previous seven trading sessions before a whole bunch of investors apparently decided it was time to get in. Of course, as Mr. Zweig accurately points out, periods of high volatility are fleeting and the time to buy an investment tied to volatility is when volatility is low, like it was in March and April.

Mr. Zweig interviewed Dr. Robert Engle, who shared a Nobel Prize award in economics in 2003 for his research on volatility. Engle added that periods of high or low turbulence don’t persist indefinitely. “When you’re in a stormy period there’s a tendency for the storm to end. If you want to capitalize on volatility, wait until markets are calm, not stormy.” he said.

The implication is that buying after a large price move in any asset class multiplies the investor’s risk of being wrong. So as hard as it is to fight the flow of negative news, both financial or otherwise, be careful about making your decision to sell or buy an asset too late.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing.

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