Where does the S&P go from here?

The index is above 1,400 for the first time since May. What if the market moves 'violently sideways' over the next year?

By MSN Money Partner Aug 10, 2012 2:16PM

By Martin Tillier, guest columnist

 

The Standard & Poor's 500 Index ($INX) closed above 1400 on Wednesday for the first time since May. Our love of round numbers will result in a slew of articles predicting that the index will continue to roar up or come crashing down. Both sides will have strong arguments for their case, and which you believe will depend on your positions and disposition.

 

When Bill Gross spoke this week of the death of equities, he was referring to long-term yields, and cautioned not to expect 6%-7% from a passive buy-and-hold strategy, as has been the case in the past. He is co-founder of a company that makes its money from bonds and the active management of equities, so he has been accused of talking his book. As I said, our own positions and disposition are the biggest influence on our views. It is a matter of perspective, not deception or cynicism.

 

I am well aware of Casey Stengel's advice to "never make predictions, especially about the future," but will wade in anyway. I am, by nature, a contrarian. Twenty years in the FX market will do that to you. It is tough to take a contrarian view when commentators are equally divided between surge and collapse, but an honest analysis of the situation leads me to one anyway.


I hereby boldly predict that over the next year or so the market will move violently... wait for it... sideways! OK, so a prediction that we are not going anywhere for a while is not very sexy, but I believe it is a logical one.

 

The thing is, in their own way, both arguments are right, with caveats. Corporate profits are high, but profit growth is slowing. Another recession in Europe is possible, but in my opinion, there will not be a complete breakdown. The housing market is recovering, but over half of new mortgages are still re-finances. The fiscal cliff is coming, but history tells us a last-minute deal will be reached. Unemployment is stubbornly high, but productivity is at record levels and any increase in demand will probably trigger more hiring. You get the picture.

 

A view that the market will move "violently sideways" is not a cop out. A wise trader impressed on me years ago that there are three positions: long, short and square. Understanding that the market will be volatile, but directionless, leads to certain conclusions.

 

1. Buy high quality, range-bound stocks on bad news and sell them on good news.

Yum Brands (YUM), Microsoft (MSFT) and Boeing (BA) are all quality companies whose stock pays a dividend, and has been somewhat range-bound over the last six months, but are vulnerable in the short term to bad news. Buying a falling stock on bad news is hard for most people to do, but if you accept the "violently sideways" big picture view it makes sense. Similarly, selling near the top of the range is easier as part of a plan.

 

2. Embrace volatility.

I would rarely recommend derivatives of derivatives because of technical problems with contango, but the iPath S&P 500 VIX ST Futures ETN (VXX) offers a convenient way to access the measure of volatility. With this note trading at or near record lows, there would certainly seem to be some room to the upside right now. Keep in mind, however, that, if the overall assumption is correct, bad news will be followed by good. The strategy therefore requires selling into any rally in the "fear index" and reverting to tactic number one.

 

3. Buy yield.

If you are expecting an essentially flat market, having a portion of your stock portfolio dedicated to yield only makes sense. Try mixing traditional, defensive dividend stocks such as consumer staples with high yielding, volatile instruments such as mortgage REITs and energy trusts.


In the consumer staples sector, tried and trusted names such as Wal-Mart (WMT) and Phillip Morris International (PM) are worth consideration. Mortgage REITs are well positioned to take advantage of further improvements in the housing market. In this sector, Chimera Investment Corp. (CIM) may have potential now that the uncertainty surrounding its SEC filings has been resolved, and has a juicy 15% yield. VOC Energy Trust (VOC) is a young trust with experienced management and also has a yield around 15%. Don't get carried away with these two, however. Yields this high are reward for significant risk, but riding out the swings is easier as part of an overall strategy.

 

In general, that is the point. Periods of violent sideways movement are tough on traders and investors alike. Entering them with a clearly defined strategy, however, makes it easier to stay the course and can even be quite profitable. Of course, the other way of dealing with volatility that takes us nowhere is to pull out of the markets altogether and accept a miserly interest rate on a money market account or CD, but where's the fun in that!

 

Martin Tillier has been dragged, kicking and screaming, into the 21st century, and can now be followed on Twitter @MartinTillier.

13Comments
Aug 11, 2012 12:50AM
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Buy low: you need to get off the drugs buddy. The market is not up 62% and Obama has nothing to do with the stock market. If your going to choose that route, why don't you also give him credit for the unemployment rate that has gone up only after he took office? I don't know how you figure the country has never had it so good, when the majority of Americans are out of work, fuel prices are at an all time high, unemployment is off the charts, the housing market has collapsed, the tax payers are paying for the bailouts, more than ten years of war we can't afford to spend on anylonger, the county's debt can't be brought down and last but not least.... Obama care has found a way to creat a new tax the people never wanted! so, tell us how your not in the 1% group and yet doing so well? It's obvious your a jack a$$!!!   
Aug 10, 2012 8:02PM
Aug 11, 2012 3:04AM
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Obama hasn't done a damn thing.  He cancelled the yearly cost of living increase for all the Federal Employees.  Well, I know 50,000 federal workers that won't be voting for him again.

 

I don't consider myself a REP or DEM but I will vote REP next election.

Aug 10, 2012 2:45PM
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considering the performance of the market the last 13/14 years, violently sideways isn't much of a stretch.  good suggestions thank you
Aug 10, 2012 8:03PM
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Its nothing more than another ponzi scheme albeit legal.
Aug 10, 2012 8:15PM
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Without even noticing to pull the needle of hopium out of its arm, the market lurched towards the window, crashing over the couch, before bounching off the fireplace, and finally staggering violently sidways through an open door.

Who writes this stuff?
Aug 10, 2012 4:14PM
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WOW  IS BENOOKIA ON TO SOMETHING OR WHAT?????
Aug 13, 2012 8:15AM
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Well Trophy...

Government DOESN'T give money to ANYBODY when they lower taxes.....they let you, KEEP YOUR MONEY!!!

When they do take your money, my money, the rich's money (however you want to define rich), THEN they dole it out as THEY see fit. Usually to who ever has the strongest lobby, or promises the highest re-election cotribution.

That's what guy's like you can't get through your thick skull......we have a OVER SPENDING PROBLEM, not an UNDER TAXED problem.

So for all you people who believe otherwise, explain in a sentence or two how we are going to spend our way out of debt and tax our way into prosperity.  And if you're going to remain consistant in your philosophy, next time one of your kids calls you from college or their new appartment having spent all their money and are behind on thier bills don't you DARE tell them they are over spending, you just reach down deep into your endless pocket of money and send them a big old check and tell them "don't worry honey, there's penty more where that came from".

Aug 11, 2012 5:27PM
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I find it funny how people blame Obama for the mess we are in. Granted, I do believe the money spent to get the economy going could have been much better used. At the same time you have uninformed people blaming Obama for the economy. The economy is in the shape it is in because of 8 years of republicans in the office. Giving tax breaks to everyone but more tax breaks to the rich. Estate tax alone used to be anything over 300,000 dollars and is now 5,000,000? The rich will tell you they are in a tax bracket of 45%. They fail to tell you that with all the tax breaks their actuall tax rate is actually below 15%. Anyone tells you different then they should get a new accountant or they are just plain lying. The unemployment rate is not Obamas fault. It was all handed to him the day he took office. People blame him for the economy and all the money he spent. He had to spend the money so that the great depression didnt look like a dimple in our time line compared to what 2008-2009 and beyond would have looked like. I live in wisconsin and the first thing Gov Walker did in office was give away 40,000,000 dollars of our tax money to create new jobs. After close to three years where are the jobs. Why is wisconsin at the top of the list for least jobs created. The only thing a republican will do in office is give away more of our tax money to the rich and someone will eventually wind up paying for it. Their called the low and middle class of america.
Aug 12, 2012 4:01PM
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I put a comment on 4 comments ago. Looked at it a day later with 8 thumbs up and 6 down. All I commented on are the facts. I find it hard to believe there is 6 down which is close to half. Are people that blind. I have recently come to find that our country is not in the shape it is in because of our politicians but those that have voted them into office as the thumbs down on my factual comment represents.

Aug 11, 2012 7:27AM
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I think Wall Street leads to either Bleeker Street or Hope Street.   It just depends on which direction you’re going, up-town or down-town.  

 

That'll teach you to ask a New Yorker for directions.

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