{"id":18953,"date":"2013-03-13T11:00:09","date_gmt":"2013-03-13T15:00:09","guid":{"rendered":"http:\/\/www.ino.com\/blog\/?p=18953"},"modified":"2013-03-13T11:00:13","modified_gmt":"2013-03-13T15:00:13","slug":"are-you-prepared-for-a-market-drop","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2013\/03\/are-you-prepared-for-a-market-drop\/","title":{"rendered":"Are You Prepared For a Market Drop?"},"content":{"rendered":"

The stock<\/span> market<\/span> has experienced the perfect storm of bullishness in 2013.<\/p>\n

The Dow Jones Industrial Average is making new all-time highs, surging more than 9% within the first three months of the year. Meanwhile, the broad market barometer known as the SP 500 has pushed within 20 points of the all-time high of 1,565 reached back on Oct. 9, 2007.<\/p>\n

The market rally is being fueled by an ideal combination of the Federal Reserve's quantitative easing measures mixed with improved housing numbers and employment data.<\/p>\n

However, no matter how bullish<\/span> things appear, markets never rise in a straight line. There are always pullbacks, negative news and other bumps in the road.<\/p>\n

Knowing this fact, the question is, are you prepared for the inevitable pullback?<\/p>\n

While no one knows for certain when the rally will<\/span> falter, there are definitive signs of a short-term top starting to develop.<\/p>\n

\"\" First, there is the seasonality<\/span> issue<\/span>. As I said before, the \"March effect\" may present another market sell-off.<\/p>\n

\"\" In addition, interest rates are slowly starting to tick higher in the bond<\/span> market. Recently, the price of the 10-year Treasury note<\/span> fell 16\/32 to 100 2\/32, and its yield<\/span> climbed to 2%. And as noted pundit Nouriel Roubini says, President Barack Obama's tax increases are going to severely affect spending in the second half of the year, resulting in a steep stock market decline.<\/p>\n

\"\" Finally, the CBOE<\/span> Volatility Index<\/span> (VIX<\/span>) is below its long-term support on the weekly chart, as you can see below. Also known as the \"fear index,\" the VIX<\/span> measures the expected volatility in the market based on SP 500 option<\/span> contracts. The VIX moves inversely with the stock market. In other words, when stocks<\/span> go up, the VIX index drops and vice-versa. With the VIX trading below its technical support of the past three years, an upward move seems overdue. This move will correspond with a drop in the equity<\/span> markets.<\/p>\n

\"\"<\/p>\n

Fortunately, there are ways to prepare your investment<\/span> portfolio for the inevitable decline while maintaining exposure to the stock market.<\/p>\n

One way is by switching your stock holdings into low-beta, which measures the volatility of a stock. The lower the stock's beta<\/span>, the lower the risk compared to the broader market. Consumer staples<\/span> and utilities are considered low-beta investments<\/span>.<\/p>\n

As soon as the public catches on that the bull<\/span> run has faltered, there will be a race to the safety of these types of investments, pushing them even higher. They provide safety as well as growth potential.<\/p>\n

However, I like the convenience, built-in diversification<\/span> and professional design of exchange-traded funds<\/span> (ETFs<\/span>) better.<\/p>\n

Here are two ETFs to help you get started building a low-beta portfolio to help weather and even profit<\/span> from the pending stock market drop.<\/p>\n

1. <\/strong>SPDR<\/span> SP Pharmaceuticals ETF<\/span>
\nSPDR SP Pharmaceuticals ETF (NYSE: XPH<\/a>)<\/strong> is a pharmaceutical-based exchange-traded fund<\/span> that has a beta of 0.82 against the SP 500 index, which has a beta of 1. This beta is higher than what you might consider a low-beta ETF, but let me explain why.<\/p>\n

The fund has solid returns with more than 9% year-to-date and nearly 18% during the past three years. While blue-chip pharmaceuticals such as Eli<\/strong> Lilly (NYSE: LLY<\/a>)<\/strong>, Pfizer (NYSE: PFE<\/a>)<\/strong>, and Merck (NYSE: MRK<\/a>)<\/strong> all have very low betas, this ETF has only 17% exposure to these big-name pharmaceuticals.<\/p>\n

Its designers combined the solid-value firms with edgier growth-oriented stocks such as\u00a0Salix (Nasdaq: SLXP<\/a>)<\/strong> and Questcor (Nasdaq: QCOR<\/a>)<\/strong>. The clever mixture has provided a beta less than the SP 500, while allowing for impressive appreciation<\/span>.<\/p>\n

\"\"<\/p>\n

 <\/p>\n

2. <\/strong>Guggenheim Frontier Markets ETF
\nI was surprised to see Guggenheim Frontier Markets ETF (NYSE: FRN<\/a>)<\/strong> on my list of low-beta, low-relative volatility ETFs. I immediately thought it must be a mistake. After all, frontier markets such as Kuwait, Nigeria and Kenya are very volatile, right?<\/p>\n

Well, the surprising truth is that frontier markets have shown much less volatility than the MSCI Emerging Markets<\/span> Index and even the SP 500 during the financial crisis of 2008 and today. Boasting a beta of just 0.75, this ETF appears to be a solid place to ride out any U.S. stock market storm while taking advantage of global growth in under-the-radar markets.<\/p>\n

\"\"<\/p>\n

Risks to Consider: The stock market has inherent risk. No one knows the future and anything can happen. However, a well-diversified portfolio including unexpected low-beta, stocks has been proven to build wealth over time.
\n<\/em>
\nAction to take --<\/strong><\/span> XPH and FRN are wise investments for those building a portfolio that will weather any market storm. XPH is a mass sense as a momentum play with lower beta than the broad market. It is obviously correlated to the U.S. markets, so it will benefit should the bull market<\/span> continue, yet provide a margin of safety<\/span> due to its lower beta. FRN should be used as a choice for those seeking safety away from the likely pending dip in the U.S. markets.<\/p>\n

Could You Really Collect $55,000 a Year in Retirement?<\/span><\/b>
\n<\/span>Now it's possible thanks to \"Retirement Savings Stocks.\" These high-yielders dish out enough income for you to golf every day... go to Hawaii four times a year... and still have more than enough left over to fund your children's or grandchildren's education. To learn about these exclusive retirement stocks, click here.<\/a><\/span><\/span><\/p>\n


\n\"\"
\nDavid Goodboy<\/i><\/p>\n","protected":false},"excerpt":{"rendered":"

The stock market has experienced the perfect storm of bullishness in 2013. The Dow Jones Industrial Average is making new all-time highs, surging more than 9% within the first three months of the year. 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