How frequent are ultra-volatility days -- those during which the market moves 3% or more? More common than one might think.
Tom Dyson in Daily Wealth defines notes that ultra-volatile days -- or UVDs -- have occurred 115 times in the S&P 500 since 1950, or an average of two per year. Between 2002 and 2003, the S&P 500 had 21 UVDs. Over the same period, the Nasdaq experienced even more -- some 51 UVDs.
Says Dyson, "UVDs really aren't that extraordinary. And because they aren't, there's no need to change our investment strategies because of them. These things happen."
In fact, he notes, the only reason the press is making a big deal out of this one is because it had been a long time since we last saw one. The last UVD was in March 2003, nearly four years ago.
Meanwhile, he explains, "If you are concerned that this decline could be the start of a bear market or you just want to hedge your portfolio, here are two liquid stocks you need to own: the CurrencyShares Japanese Yen Trust (NYSE: FXY) and the iShares Lehman 20+ Year Treas.Bond (ETF) (AMEX: TLT)."
He calls these the two best positions to own in case of a global meltdown. He notes that as the US market dropped 400 points on Tuesday, the Japanese Yen fund rose 2.2% while the Lehman 20+ Year Bond fund rose 1.3%.
He explains, "The Japanese, through their incredibly low interest rates, have sponsored much of the global speculation. It's called the Yen Carry Trade. And to liquidate positions, speculators need to buy yen. And this makes FXY rise when everything else is falling.
"Meanwhile, When investors get scared, they flee to safe investments, like Treasury bonds. U.S. Treasury bonds have the highest-possible credit rating, are extremely liquid, and, right now, yield around 4.5% annual interest. When the going gets tough, Treasury bonds go up, and TLT is an ETF for the 20-year Treasury bond."
Dyson concludes, "Tuesday was probably just another day in the market, and I'm not going to change the way I make investments as a result of it. But if you think it could be the start of something bigger or you want to hedge some of your exposure to stocks, FXE and TLT are good places to start."
Steven Halpern's TheStockAdvisors.com provides a free, daily overview of the latest stock ideas from the nation's leading financial newsletters.
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