Volatility Clouds 2012 Predictions

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(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA. VIX and Short data sourced from Yahoo! Finance, all other data from Finviz.)

When it comes to predicting the future, investors might as well be throwing darts at a board, says Brett Arends of Marketwatch, they might even have better luck.

That’s because when it comes to analyst predictions for the year ahead, there is no guarantee. A year is a long time, and most of the surprise bumps in the road can’t be fully accounted for.

Making Predictions

Reuters reports Blackstone Vice Chairman Byron Wien, among Wall Street’s best known prognosticators, presented his 10 surprising predictions for 2012. They go so far as to suggest oil prices will drop to $65 a barrel.

Furthermore, “BlackRock equity strategist Bob Doll foresees double-digit U.S. stock returns, though corporate earnings growth could lag expectations. And one well-known forecaster declared 2012 too hard to predict.”

Facing the Music

Perhaps this “well known forecaster” has faced the music – analyst top picks have rarely been the best guideline.

For example, at the start of 2011 the S&P 500 stocks with top buy ratings would have returned -3.5% if you kept the dividends and cashed out at the end of the year.

“Over the previous five years — you can now make that six — Wall Street analysts ‘top 10′ stock picks have actually earned you slightly less over time than the index,” says Arends.

Interestingly, in 2011 Wall Street’s most hated stocks only fell 4.3%.

“In other words, the 10 stocks that analysts loved the most beat the stocks they hated the most by an average of less than 1%… Historically, this, too, is something of a pattern. In previous years the “most hated” stocks hadn’t been much worse than the index, and in several years had done much better.”

Business Section: Investing Ideas

So, how can you protect your portfolio against rising stock market volatility? One way is to search for the stocks that have a high positive correlation to the VIX index, which measures the implied volatility of S&P 500 index options.

In other words, these companies tend to rise if overall market volatility rises.

To refine the list, we also screened for stocks that have seen a decrease in the number of shares shorted (i.e. a decrease in bets that these stocks will decline).

This is significant, especially when you consider that short sellers tend to be more sophisticated investors (due to the fact that they require strict credit approval to perform these trades). So if these investors are turning bullish on a stock, it’s worth paying close attention.

Short sellers seem to think there’s more upside than downside to these names, and past price action shows that these stocks do well if volatility rises. Should any of these names be on your watch list?

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

List sorted by correlation to the VIX index.

1. Meru Networks, Inc. (MERU): Engages in the development and marketing of a virtualized wireless LAN solution. The stock's correlation to the VIX index stands at 0.763. Shares shorted have decreased from 3.14M to 2.93M over the last month, a decrease which represents about 2.3% of the company's float of 9.15M shares.

2. Complete Genomics, Inc. (GNOM): Develops and commercializes a DNA sequencing platform for human genome sequencing and analysis. The stock's correlation to the VIX index stands at 0.715. Shares shorted have decreased from 1.73M to 1.53M over the last month, a decrease which represents about 1.14% of the company's float of 17.55M shares.

3. ReachLocal, Inc. (RLOC): Provides a suite of online marketing and reporting solutions for the small and medium-sized businesses (SMBs) in North America and internationally. The stock's correlation to the VIX index stands at 0.695. Shares shorted have decreased from 1.64M to 1.33M over the last month, a decrease which represents about 3.32% of the company's float of 9.33M shares.

4. Invacare Corporation (IVC): Designs, manufactures, and distributes medical equipment and supplies for the non-acute care environment, including the home health care, retail, and extended care markets. The stock's correlation to the VIX index stands at 0.691. Shares shorted have decreased from 2.51M to 1.94M over the last month, a decrease which represents about 1.97% of the company's float of 28.90M shares.

5. Cadence Pharmaceuticals Inc. (CADX): Focuses on in-licensing, developing, and commercializing product candidates principally for use in the hospital setting in the United States and Canada. The stock's correlation to the VIX index stands at 0.66. Shares shorted have decreased from 7.98M to 7.10M over the last month, a decrease which represents about 1.98% of the company's float of 44.42M shares.

6. FormFactor Inc. (FORM): Designs, develops, manufactures, sells, and supports precision and high performance advanced semiconductor wafer probe cards. The stock's correlation to the VIX index stands at 0.657. Shares shorted have decreased from 2.74M to 2.21M over the last month, a decrease which represents about 1.05% of the company's float of 50.26M shares.

7. CPI Corp. (CPY): CPI Corp., through its subsidiaries, manufactures and sells professional portrait photography of young children, individuals, and families. The stock's correlation to the VIX index stands at 0.655. Shares shorted have decreased from 1.40M to 1.28M over the last month, a decrease which represents about 2.% of the company's float of 6.01M shares.

8. DHT Holdings, Inc. (DHT): Operates a fleet of double-hull crude oil tankers. The stock's correlation to the VIX index stands at 0.649. Shares shorted have decreased from 3.14M to 2.45M over the last month, a decrease which represents about 1.34% of the company's float of 51.67M shares.

9. China Medical Technologies Inc. (CMED): Develops, manufactures, and markets immunodiagnostic and molecular diagnostic products. The stock's correlation to the VIX index stands at 0.638. Shares shorted have decreased from 5.58M to 4.40M over the last month, a decrease which represents about 5.98% of the company's float of 19.73M shares. 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets


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