Greece is going from broken to fixed to broken again faster than you can say "Papandreou," creating a nearly impossible environment for investors trying to come up with a long-term strategy.
The market is on a brutally volatile tear, with nearly one in three days over the past year resulting in a Dow industrials intraday move of more than 200 points — and more of the same on Friday.
The cause? Forget about jobs, housing or virtually anything else tied to the U.S. markets or economy. Investors seem to care about one thing and one thing only, and that's whether southern Europe — Greece in particular — can get its arms around a debt crisis threatening to spiral out of controlat any moment.
Don't like the turbulence? Get used to it.
"The market roller coaster is likely to continue," John Wraith, credit strategist at Bank of America Merrill Lynch, told clients in a research note. "The Eurozone remains vulnerable to its weak links."
So what can investors do in such an environment? Market experts offer five suggestions.
1. Take a Breather
Most of the short-term trading nowadays seems controlled by high-speed computer algorithms that go with the flow of the day's news.
With the market coming off a violent October rally — one of its best months ever, in fact — this could be a time for investors to gather themselves until the market finds a clearer direction.
"The data...suggests that we're due for a slight pullback in the near term that will be followed with some nice gains going out a month or two," Paul Hickey at Bespoke Investment Management said in an analysis. "It can't hurt to at least write some covered calls here and wait for overbought levels to work themselves off before jumping back in on the long side."
Hickey points out that the October rally was fueled mainly by investors buying up stocks that had taken the worst of the summer beatdown. In fact, the 50 stocks hit hardest from July 7 through Oct. 3 are up a collective 35 percent or so since, suggesting the rally is getting a bit tired.
"If the market pulls back, you're prepared," Hickey said. "If it doesn't and continues higher, it's tough to get too upset."
2. Go 'Neutral' But Watch Consumer Stocks
Standard & Poor's a few days ago raised its 12-month price target for the Standard & Poor's 500 to 1,360 from 1,260. Still, the firm recommends a fairly vanilla, or "neutral," portfolio of 45 percent US equities, 25 percent bonds, 15 percent foreign stocks and 15 percent cash.
However, it did raise consumer discretionary stocks to overweight and cut telecomms to underweight. The firm's hesitance is based primarily on the Greece sovereign debt situation, which it calls "unsettling and ephemeral" and one that has "reignited global risk aversion."
"While there has been plenty of technical evidence to suggest to us that the worst is over, we are still worried about the action in some markets, and that some of our longer-term indicators have yet to give the all-clear sign," Sam Stovall, S&P's chief equity strategist, said in a note.
3. Emerging Markets Emerge Again
Tightening interest rate spreads between developed and emerging markets tell Jim Paulsen that the latter class is ready to run.
The chief market strategist at Wells Capital Management has traced spread history and found that wider spreads favor developing market stock performance, while the reverse is true when the difference in benchmark rates decreases.
Moreover, he sees emerging market economies cutting rates as inflation fears subside, while major developed economies —such as the U.S., with its near-zero rate policies— have little wiggle room.
Emerging market mutual funds saw $3.5 billion in inflows last week, the most since the week ended April 11, according to Bank of America Merrill Lynch.
"Overall, a cycle has seemingly begun whereby emerging world policy interest rates will likely be lowered faster and more aggressively than will developed world interest rates," Paulsen wrote in an analysis. "If this proves correct...investors may want to consider augmenting allocations of emerging stocks relative to domestic positions."
4. Go Long — With Your Horizon
While the volatility makes for many gut-churning moments, getting out of the market now would be a mistake, says Gary Flam, portfolio manager at Bel Air Investment Advisors in Los Angeles.
True investors, he says, actually should be thinking about how they'll be positioned once Greece gets past the turmoil of its debt and political issues, which most recently have come through the waffling of President George Papandreou about whether the nation will accept bailout conditions.
"You have to be an investor and not a trader," Flam says. "When I say 'investor,' you have to be looking to invest in good companies you think can do well over the next several years and aren't depending on the next Greek vote."
Valuation is often trumpeted as a reason to buy stocks in the current environment, with the S&P 500 trading at a 14.5 price-to-earnings ratio. For Flam, the current era is reminiscent of the 1977 to 1982 market run that saw three bear market sell-offs and one near-bear — but which was followed by a massive bull move.
"On every sell-off they should be building up their equity exposure, because at some point over the next couple of years that next secular bull market is going to begin," he says. "No bell is going to go off to signal it, but you want to be exposed to equities by then."
5. 'Buy What You Know' (But Not Banks)
Those willing to take the longer view, then, might want to look away from betting on bouncebacks for the losers, but rather toward the familiar that will last through extended debt-crisis turbulence.
"When you're in a world like this, the best thing to do is get back to the basics. You get back to blocking and tackling, you buy what you know," says Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh, Pa. "I like buying high-quality companies that you can fall asleep for 10 years and you know what they do."
For instance, he likes Kraft Foods because "people are going to eat macaroni and cheese and they're going to pay us 4 percent" dividend despite the broader market movements. He also cites Caterpillar because "you know what they do. That's the way you suppress all this volatility."
Baum, though, doesn't like the uncertainty of banks in the current regulatory environmentand their potential exposure to a global debt crisis.
"There are trap doors that nobody knows about," he says. "It's much easier to go back to the basics."