Last week the Dow dropped 10% in just five days. Now, it is up 7% in just two days. What gives? In a word: Volatility.
But savvy investors are still able to earn profits of 3,291% even when markets turn volatile!
It’s pretty clear that market volatility is here to stay, and big whipsaw moves both up and down are just part of the landscape of markets these days. But market volatility is no reason to panic. In fact, it’s good news for your investments.
Look, the Dow and S&P both rallied nearly 40% off the March low. That’s a HUGE move when you consider the average annual gain for the stock market in any given year is about 8%-9%. Plus, the Dow made this 40% move in just 11 weeks. That simply means stocks became overbought near term and needed a break.
In fact, more than 95% of stocks in the S&P 500 Index were trading above their 50-day price moving average the week before last. That’s an extreme bullish condition not seen in years. But it also means that perhaps stocks moved a bit too far and too fast.
So, don’t be surprised by turbulent trading like last week’s. You should take full advantage of it.
There is a great way to take advantage of turbulent markets in your own investment portfolio.
Ever since the coronavirus crash and rebound, smart investors have been piling into stocks most likely to not only survive volatile markets but thrive.
As you can see in the chart above, the clear stock market winners are, and will continue to be, high-quality stocks with rock-solid financials. In fact, quality stocks with the strongest balance sheets just hit new all-time highs (black line).
Meanwhile, the weakest stocks (blue line) continue to struggle in this turbulent market. In other words, investors are being rewarded the most right now by focusing on safer, lower-risk stocks.For my money, that is the best approach to take right now.
Bottom line: The market became overbought after the big rally off the March low. Stocks needed to take a break. And that is just what the doctor ordered to refresh this market for even more upside ahead.
Near term, we may still be in for some up-and-down turbulence. But the path of least resistance remains higher as America continues to bounce back, perhaps much higher. The highest quality, financially sound stocks are leading the market. So, stick with them.