During the past few trading days, it has become increasingly clear that the impending market volatility that I’ve been warning about lately has arrived. Here’s the long and short of what is happening with the market right now…
Any time the dollar rallies—it had a dramatic rally on Friday and it’s had a dramatic rally today—the market pulls back. That’s because commodities (oil, gold, aluminum, etc.) are priced in U.S. dollars. So when the dollar rallies, commodity prices—especially oil prices—fall. I recommend a handful of commodities-related stocks, and we’re seeing the strong dollar weigh on these stocks in the near-term.
For example, Alcoa Inc. (AA) has pulled back recently because aluminum prices are falling. A lot of energy is involved in the aluminum smelting process, so falling energy prices have weighed on aluminum prices. This has caused Merrill Lynch to downgrade the stock to a hold, despite the fact that Alcoa Inc. has very positive forecasted sales and earnings. So shareholders are dealing with the aftermath of that. (As for me, AA is a B-rated Buy in Portfolio Grader, so I see this as a buying opportunity).
The truth of the matter is that the stock investors like inflation; they do not like deflation. Every time the dollar rallies, it creates deflation; so that’s why we’re seeing the market pull back. And as we saw on Monday, it doesn’t take long for investors to realize the benefits of deflation, and the market rights itself.
The other thing that is adding to overall volatility is that High Frequency Trading (HFT) systems are controlling the market. The way they work isn’t all that different from flipping a coin: If the market is up on Monday, it’ll pull back on Tuesday. If the market is down on Tuesday, it’ll likely rebound on Wednesday. If you look carefully, you’ll even see this occur within the course of a single trading day.
With HFT systems running amok, we all need to get used to the seesaw pattern of the market right now. That’s the bad news. The good news is that you can do something about it. For starters, you should be running each and every one of your holdings through Portfolio Grader to check that your portfolio is in good shape. And if you want to take your investing strategy to the next level, I’ve been doing quite a bit of "spring cleaning" across my investment newsletters. For the past several weeks (in some cases, months), I’ve been fine-tuning each and every Buy List, Portfolio and Model Portfolio I manage to better cope with whatever the market may throw at us.
Either way, I’ll be in touch in this daily blog with additional market updates, my stock analysis and more.