When a pullback happens, you need to be prepared.
That statement might ring hollow considering the fact that
themarket is bumping up against all-time highs, but I can assure
you, it could happen quicker than you think. When it does, you'll
want to have enoughcash on hand to pick up some bargains.
You'll also want to have your own "pullback wish list."
To assist in that pursuit, I asked StreetAuthority's topstock
market strategists to name the first one of their portfolio
holdings they would buy more of if prices suddenly "corrected" by
10%. (You can read Part 1 here and Part 2 here.)
Here's what they had to say:
My two advisories are the only ones in the StreetAuthority lineup
that are geared toward one narrow sector of the market: natural
resources. That means I'm probably keying on different economic
and industry data points than my colleagues.
I stay tuned in to things like employment and consumer
spending, of course, but I'm more interested in reports that
illuminate current trends in the commodities world -- such as
crop estimates, copper production and natural gas stockpiles. I
spent most of my morning today evaluating Australia's iron ore
As always, I'll be paying particular attention to China, which
exerts considerable influence overcommodity prices. China's
economic health can literallymean the difference between
shortfall and surplus for many raw materials, so I stay glued to
the country'smonetary policy , infrastructure spending,
manufacturing output and otherfactors .
As we head into the summer months, my biggest areas of
emphasiswill be in the aerospace and auto sectors -- not because
I've invested in plane and vehicle makers, but because many of my
holdings are predicated on their success. Earlier this week,
Turkish Airlines placed a $6.9 billion order for 70
jets. Few people noticed. But I'm celebrating, because much of
that $6.9 billion will be spent on raw materials like aluminum
and cobalt and titanium alloys -- that's good news for a number
of my holdings.
The first stock I would buy on a pullback?
Linn Energy (Nasdaq: LINE)
, the most conservatively managed company I know of. If Linn were
to get swept along with a sell-off in the broad market, then
investors just aren't paying attention.
The firm's protectivehedging has almost completely shielded
cash flows from a downturn in commodities prices -- every cubic
foot of gas and drop of oil have been presold through 2016 at
minimum floor prices.
That enables the company to practically printmoney for
stockholders, even in a rough environment. And when oil and gas
prices rebound, Linn can easily turn up the production faucet,
with 7,000 potential new drilling locations spread over 3.2
There are many ways for a stock market to correct. One is
simply to go sideways for a long period of time. During this type
of environment,income stocks that provide a robustyield well
above the rate ofinflation make a sensibleinvestment . Even if
the overall market corrects by retreating, a solidincome stock
should hold its value relatively well and rebound when the
overall market recovers.
And when I think of solid income stocks,
Enterprise Products Partners (
is at the top of my list. This is one of the largest publicly
traded energypartnership in the United States. It operates more
than 50,000 miles of pipelines, enough to circle the Earth twice.
These pipelines are connected to around 95% of the country's
refining capacity east of the Rockies.
Enterprise has an exceptionaldividend track record. Management
has hiked the distribution every quarter since January 2005, when
it was $0.40 a quarter, or $1.60 peryear . The latest January
distribution has grown to $0.66 per unit, which translates to
$2.64 annually, for acompound annual growth rate of 6% per year.
And the April distribution, which was announced on Tuesday, will
be $0.67 a share -- the 35th consecutive increase.
With a yield of 4.5%, EPD is one of my top picks, and a stock
I would consider buying more of on a pullback.
Volatility is the most important indicator for me to watch. I
monitor volatility on the stock market using indexes like theVIX
and on individualstocks using an indicator I developed to mirror
theVIX and expand the idea to the thousands of stocks that trade
When prices fall, volatility rises. This is true for
individual stocks and the market in general. Since most stocks
follow the general trend of the market, a sell-off would increase
volatility in many of the stocks I'm watching and create a number
ofincome trading opportunities using options.
Options prices are determined by a number of factors, but
volatility is the most importantfactor . Other factors include
the amount of time toexpiration of theoptions contract and
interest rates, items that change slowly. Volatility can change
in minutes and could drive options prices much higher or lower
when they do. That's great for options sellers, because we
generate more income when options are expensive.
Sometimes, the options market gets a little crazy, and the
prices we see are much higher than expected based on pricing
models. When that happens in value stocks, we have an exceptional
trading opportunity. In other words, a sell-off would create many
opportunities to generate large amounts of income selling
While I'd welcome a market sell-off because it will create
some mispriced options, I don't know which stocks will be the
best to trade until the decline happens. That's why my advisory,
, is published weekly. There are thousands of stocks and a
variety of different options contracts on those stocks. On a
recent day, my software ran through more than 175,000 different
options contracts to find trading candidates. A market decline,
especially a quick one, would give me a chance to trade alot of
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