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Investing Strategies: Market Mood Swings

Wednesday, 5 Oct 2011 | 2:46 PM ET
CNBC.com

The last hour of the trading day has given us whiplash in the past few weeks.

You look up one minute, the Dow is down more than 300-points and a few minutes later it’s back into positive territory or vice versa. (Get The Latest Market News Here.)

The most volatile day in 2011 was back on August 8th when the VIX (the volatility index) rose 50% on a single day to settle up at 48, its highest closing level since 3/9/2009 (the last bear market bottom). Last quarter, the VIX rose 160% to end Q3 at 42.96, its largest quarterly % increase ever with data tracking back to 1986 YTD, the VIX is up 120.5%.

What’s driving all the volatility? How do you position yourself in the times of wild (mood) market swings?

Vadim Zlotnikov, Chief Market Strategist at AllianceBernstein said “the only certainty is volatility.” Despite the volatility, Zlotnikov expects the market to be “range-bound” for sometime. “Volatility is also made more pronounced by the very risk-management practices that are designed to mitigate it, as well as the fact that we lived through 2008 and appear ready and willing to extrapolate current crisis into another 2008,” Zlotnikov added.

Liz Ann Sonders, Chief Investment Strategist with Charles Schwab believes investors “are digesting our own fundamentals and our own economic data we see so much volatility” in the last hour of trading. “It’s a bit of a tug of war between what’s going on in Europe and what is nothing worse than mixed economic news,” said Sonders.

When it comes to our economy, a recession is always a possibility but Zlotnikov doesn’t think that will be the case. Zlotnikov believes the US “still have very good liquidity and ton of pent up demand for capital spending and durables. Confidence is the key. Policy to address/facilitate new business formation may offer respite.”

Positive Sentiment

When it comes to investor sentiment Sonders said “sentiment conditions couldn’t be better for the market. Sentiment is on the floor—this is a contrarian indicator that we could be setting up for a rally.” Having said all that, Sonders warns we are not out of the woods yet because we’re still at the mercy of Europe so we’ll just have to “live with extremes of volatility.”

Zlotnikov is all about the data. “Investment backdrop remains exceptionally “data driven”, as absence of a coherent policy framework for addressing the numerous concerns is nowhere to be found, and traditional “fiscal solutions” are very hard to implement in the high deficit environment.”

Diversify in Volatile Times

Diversify, diversify, diversify is the key strategy in protecting your portfolio in volatile times. Sonders recommends her clients “to be very diversified within fixed-income. Have a barbell strategy. First U.S. asset classes are likely to perform best in relative terms, emerging markets comes in second.” As for stocks, Sonders is bullish on techs.

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