After a strong day of trading February 1, the first full week of this month started off yesterday with a strong bearish momentum inspired by big drops in Europe. With the FTSE 100 down 1.58%, the German DAX down 2.49%, and the Euro STOXX 50 down over 3%, today was another day for investors to sell off on fears that the European debt crisis will hinder America’s equity renaissance.
The impact was uneven in the market, but a sharp turn from January’s performance. While many may fret what this means for equities in the near-term, savvy investors look forward to days like this as opportunities to squeeze even more appreciation out of their stock portfolios.
A European Start
To understand the market’s move, we need to first look at Europe. Fears that the European debt crisis, which remains placid albeit unresolved, came to a head in Europe before New York traders got out of bed. European companies saw their market caps shrink yesterday as investors pulled out. While some investors acknowledged that a lot of this is mere profit taking–the Euro STOXX 50 was up nearly 10% last Friday–other, more loss-averse folks saw this as a sign that the fearful days of 2010 and 2011 were back, when Europe’s mix of austerity and bond yield appreciation caused an economic crisis that largely put the breaks on a global recovery from the subprime mortgage crisis.
American markets followed suit as investors worried that the chill would come this side of the pond and impact companies who are dependent on European suppliers, vendors, and consumers. The sharp decline was also a wake-up call that the world economy is by no means healthy, and perhaps the equity market has been too bullish in too short a time. (This type of correction is not unusual; a similar movement occurred at the beginning of February 2012; it lasted about a week.)
Whether this newfound caution will stick or not, the mood Monday morning sent a clear signal to everyone: the week was going to start off bearish, with a mix of earnestly pessimistic investors pulling out of equities and more aggressive swing traders taking profits before a very likely market fall.
How to Profit from This Market
There are several ways traders profited yesterday; here are just three ideas:
1. Long gold. Gold had a modest jump today, ending the day up 0.29%. A short, heavy bet on gold paid off quickly and with minimal risk; the equity futures momentum pre-market, combined with Europe’s fall, signaled a clear bear day for stocks that allowed day traders of gold to pounce and profit in a short period. A trader putting $50,000 into the SPDR gold trust at the opening bell could sell off at the market peak for a one-day gain of $390–not bad for a day’s work.
2. Long the VIX ETF. More aggressively, bets on higher volatility paid off with a 6.89% gain in VXX, which tracks the VIX volatility index. This index has been a poor performer historically, and its mechanics are questionable, but it is a great tool for short-term bets on a bad market day.
3. Momentum trade your holdings. Both company fundamentals and technical indicators suggest a number of stocks, especially in U.S. based companies, have more room to go up before a more fundamental crisis causes the market to pause. Simply put, today was a great day for profit taking your long-term holds. For instance, GOOG’s YTD chart shows a 7.3% appreciation already for 2013, and an investor who believes in the company’s strong fundamentals could easily use today to take home some of that 7+% gain. A trader long GOOG for $50,000 who held a limit sell order at 770 and bought back at the end of day price (759.02) could pick up an extra share just by making this quick trade.
Volatility is good for quick turnaround trades, because it offers plenty of high-value entry points that reward short-term plays. Riding these waves requires conviction, patience, and a stomach of steel. But for those who have the skills, these volatile days are a great way to squeeze a little extra short-term capital gains from just about any portfolio.