Markets are up year to date, but the uptrend this time had to brave a lot of volatility so far. The roller coaster ride has continued throughout this year, making it difficult for investors to make a convincing decision. Strategies like buy and hold, hedging or others may become a difficult task in times of volatility.
The Roller-Coaster Ride
The CBOE Volatility Index (VIX) demonstrates the year’s market volatility. The VIX is “a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.” The index moves in opposite direction to market trends; it being a "fear-gauge" index.
In January, the index gained 9.2%. This was followed by a significant 36.4% downtrend in February. Again in March, the VIX jumped 14.6% but was followed by a 4.8% decline in April. So far in May, the VIX is down 16.8%.
In January, all benchmarks closed in the red. Global economic concerns and a continual slump in fuel prices emerged as the major headwinds. The political situation in Greece also weighed on markets. Markets experienced their best month in more than two years in February, right after a particularly tough January. International tensions reduced following a successful conclusion to Greece’s debt talks.
Markets moved in the opposite direction again in March. Investors remained concerned about multinationals’ first quarter earnings results due to the strengthening U.S. dollar. Despite mixed to disappointing domestic economic data, benchmarks managed to close in the green in April. Weak GDP numbers meant that Fed officials could not provide clear indications about the timing of a rate hike.
So far in May, benchmarks are trading in the green. Markets were guided by earnings numbers, Fed Chair Janet Yellen’s comments that stock valuations are “quite high”, and Greece’s debt crisis. Meanwhile, movement in bond yields and fluctuations in the biotech, technology and small cap stocks added to volatility. Dollar volatility is somewhat prevalent and so is the guessing game about Fed’s first rate hike.
More Volatility Ahead?
Guessing the timing of the initial rate hike has added plenty of volatility, and this will continue. Markets have both enjoyed gains and suffered losses based on expectations of a sooner-than-expected rate hike and quickly turning it into expectations of a delayed hike.
This guessing game will help keep volatility alive. For example, FOMC minutes suggesting a delayed rate hike was quickly followed by comments from Fed Chair Janet Yellen and Fed Cleveland President Loretta Mester that suggested rate hike may not be delayed.
Economic data has continued to be mixed, and GDP reports are good example of that. In March, the third estimate showed fourth quarter GDP increased at an annual rate of 2.2%, less than the consensus estimate of a 2.4% increase. Data in April revealed that according to the “advance” estimate, first quarter GDP increased at an annual rate of 0.2%. This was less than the consensus estimate of an increase by 1%. Again, dismal GDP data was followed by encouraging consumer price index data. The core CPI enjoyed best increase since Jan 2013.
Also if we look at the nonfarm payroll data, a strong 295,000 job additions in February was followed by a dismal 126,000 jobs in March. In April, 288,000 jobs were added. The mixed economic numbers again change investors’ guessing game about the timing of a rate hike. Also, the FOMC minutes have not provided a consistent clue.
Apart from these, markets had to deal with dollar fluctuation and positives and negatives from Europe and elsewhere. These events may continue as well, intensifying volatility. Now, the movements in bond yields have been affecting markets, guiding them up and down.
3 Stocks to Beat Volatility
Amid the roller-coaster ride, investors may buy the following 3 stocks that should brave the volatility. The following stocks carry either a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) and have seen encouraging price gains this year.
Additionally, with our new style score system we have identified the key statistics to pay close attention to and thus which stocks might be the best for investors in the near term. These stocks carry a Momentum Style Score of ‘A.’
The Momentum Style Score indicates when the timing is favorable to enter a stock to take advantage of the momentum with the highest probability of success. The momentum-effect is quite strong among Zacks Rank #1 and #2 stocks because as earnings estimate revisions rise, prices race to keep up and anticipate future estimate revisions, resulting in even bigger gains.
Moreover, the stocks carry low beta. Beta measures the volatility of a stock in contrast to broader markets. Stocks with beta lower than 1 will show less volatility than the broader markets.
Ellie Mae, Inc. ELLI operates electronic mortgage origination networks in the United States. California-based Ellie Mae’s network and technology-enabled solutions help streamline and automate the mortgage origination process.
Ellie Mae currently carries a Zacks Rank #2 and has gained 22.4% year to date. Ellie Mae has a Momentum Style Score of ‘A.’ It carries a beta of just 0.37. Current quarter and current year estimates were revised up by 85.7% and 32%, respectively, over the last month.
Affymetrix Inc. AFFX is a leading provider of life science and molecular diagnostic products. Affymetrix’s products help in the analysis of biological systems at the gene, protein and cell level.
Affymetrix currently carries a Zacks Rank #2 and has gained 21.6% year to date. Affymetrix has a Momentum Style Score of ‘A.’ It carries a beta of just 0.53. Current quarter and current year estimates were revised up by 16.7% and 17.9%, respectively, over the last month.
Cirrus Logic Inc. CRUS is a premier supplier of high performance analog circuits and advanced mixed-signal chip solutions. Cirrus offers a range of audio products such as including analog-to-digital converters (ADCs), digital-to-analog converters (DACs), amplifiers and adaptive noise cancelling circuits among others.
Cirrus Logic currently carries a Zacks Rank #1 and has gained 60.6% year to date. Cirrus Logic has a Momentum Style Score of ‘A.’ It carries a beta of just 0.57. Current quarter and current year estimates were revised up by 65.2% and 13.2%, respectively, over the last month.
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