Stay Calm, Keep Watch: How to Profit from Rising Market Fear

Stock Market About to Move to More Interesting LevelsWe are seeing some extreme nervousness building up around the stock market as investors scramble to the exits, fearing the next big market collapse is upon us.

The anxiety level is high, as indicated by a surge in the Chicago Board Options Exchange (BOE) Volatility Index (VIX), but the world isn’t coming apart, as many investors and analysts are thinking. There will, however, be some turbulence in the weeks and months ahead, as I said in my annual assessment back in January.

With the easy money flow starting to decline after the Federal Reserve announced its second straight $10.0-billion slash from its monthly bond buying at its FOMC meeting last week, it’s not a surprise to see fear in the stock market rising.

We all knew the easy money made in the stock market in 2013 was an aberration and was artificially driven by the central banks of the world; we all knew that this year would be more difficult.

Look, we are not going to see 20%–30% gains this year in the stock market. Instead, as I sit here and look at my screens, what I see is a buying opportunity emerging in the stock market. As long as the economy continues to advance as indicated by the fourth-quarter gross domestic product (GDP) growth of 3.2% announced last week, I’m encouraged.

As I discussed in previous commentaries, I want the stock market to return to some degree (even just a smear) of normalcy in which gains are based on the underlying fundamentals, and less on the Fed.

The selling in the emerging markets is expected, given the Fed’s cuts. The cheap money that was used to buy higher-yielding assets in the emerging markets is drying up, and this is resulting in a tense situation. But as I recently suggested, I look at the emerging markets as a key growth region going forward; albeit, there will be short-term bumps and hurdles. (Read “Emerging Market Chaos an Opportunity for Investors?”)

This is a time to hold off and watch if the stock market can settle down and attract some possible oversold buying support.

The reality is that the Dow Jones Industrial Average is down a little more than five percent in January and from its high, so we could easily see more downside weakness before a base support level emerges. The S&P 500 is down just more than 3.7% from its high, so again, there will likely be more weakness to come in the stock market, and that means opportunity.

I’m sure many of you took profits in late December, prior to the year’s end. The key is patience at this point, but also make sure you have some capital available, as I feel the stock market will move to lower levels where the valuation becomes much more interesting.