Market Volatility Is A Good Reminder To Give Your Portfolio A Check Up

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(Friday Market Open) Equity index futures are inching lower in premarket trading and pointing to a lower open. The Nasdaq Composite ($COMP) is working on its worst January ever, falling more than 15% so far this month; unless something drastic happens on Friday, it’ll have its fifth down week in a row. However, the Dow Jones Industrial Average futures are leading the premarket slide on earnings reports from constituents Chevron CVX and Caterpillar CAT.

Earnings season continues with a surprising miss from Chevron CVX. CVX missed on earnings estimates despite better than expected revenues. With the rise in oil prices, many investors were surprised to see CVX fall short. However, Chevron CEO Michael Wirth said that the company is being cautious about capital expenditures and increased drilling projects. Yesterday, Chevron hit a new high after announcing a dividend increase. Chevron rival Phillips 66 PSX was able to beat on earnings estimates. CVX fell more than 3% in premarket trading. PSX rose 0.56% in premarket trading.

Heavy machinery maker Caterpillar CAT beat on top and bottom line numbers, but it still fell 2% in premarket trading. The company was able to navigate supply chain and inflation issues well, but investors appear concerned about the company going forward. In a sell first, ask questions later environment, companies with less-than-stellar forward earnings guidance are getting hit.

Charter Communications (NASDAQ: CHTR) and Colgate-Palmolive CL both reported higher earnings despite missing on revenues. However, investors were split on the companies in premarket trading. Charter rose 0.71%, but Colgate fell 1.25%.

Apparel, footwear, and accessories company VF Corp. VFC announced better-than-expected earnings and revenue but fell more than 6% in premarket trading. The clothing company reported ongoing supply chain issues. If VF is a harbinger for the upcoming retailers earnings reports, we may not be out of the woods in market volatility anytime soon.  

After the bell on Thursday, Apple (NASDAQ: AAPL) reported better-than-expected earnings and revenue on higher-than-expected iPhone sales. In fact, AAPL beat on every metric but iPad sales, which were hindered by supplier problems. A company like Apple doesn’t commonly have as many supply chain problems because they tend to be on the top of the list for many suppliers. This is nearly opposite of Tesla (NASDAQ: TSLA), which isn’t going to release a new model in 2022 because of its supply chain issues. Apple rallied on the news, climbing 4.8% in afterhours trading.

Credit card company Visa (NYSE: V) is doing its best to help the Dow Jones by reporting earnings and revenues that topped analysts’ estimates and prompted a 6% rally in afterhours trading. The company has been able to fend off fintech firms, many of which have been pushed lower in the recent valuation push.

As we go into the open, the Cboe Market Volatility Index (VIX) is over 30 which could be a “strap in” kind of signal for investors. Additionally, crude oil futures are trading at another seven-year high despite the stronger dollar. As the U.S. dollar strengthens, large-cap international companies will start to struggle with overseas sales because the stronger dollar will make their products more expensive.  

Getting into the Swing

Equity index futures were swinging between the positive and negative in premarket trading on Thursday. The S&P 500 (SPX) futures ranged over 100 points from yesterday’s close to this morning’s action. The index kept on swinging throughout the day, rallying nearly 2% in the morning and then selling back into the red by lunch. However, there was much less swinging in the afternoon, when the benchmark index closed just 0.54% lower.

After Wednesday’s Fed announcement and the ensuing sell-off, investors had a lot to digest. Additionally, it was a very full morning of earnings and economic reports.

One story that came after the opening bell was when the Wall Street Journal reported that billionaire investor Bill Ackman’s hedge fund Pershing Square had acquired 3.1 million shares of Netflix (NASDAQ: NFLX). Mr. Ackman cited NFLX’s management and the recent sell-off leading to the current valuation of the stock as reasons for the accumulation. NFLX rallied more than 7.5% on the news.

After Wednesday’s close Tesla (NASDAQ: TSLA) reported a record profit, but investors appeared unsure if it was “record” enough, because the stock bounced around in afterhours trading. The biggest issue for investors appeared to be potential supply chain struggles. CEO Elon Musk confirmed that fear when he mentioned that supply chains could be a problem going forward. Eventually investors turned bearish on the stock, causing it to fall 11.55% on the day.

Intel (INTC), which announced better-then-expected earnings and revenue, dropped more than 7% on the news that the company’s management provided lower-than-expected forward guidance. INTC weighed heavily on the semiconductor group. The PHLX Semiconductor Index (SOX) fell 4.78% on the day.

Moving away from technology stocks, McDonalds MCD missed on top and bottom line estimates, but the stock only closed 0.44% lower on a volatile day of trading. Despite missing on earnings and revenue, MCD saw same-store sales grow from 6.58% to 7.5% with help from its new app. However, rising supply and labor costs were a drag on the company.

In economic news, the United States saw Gross Domestic Product (GDP) grow 6.9%, well over analysts’ estimates. Durable goods orders came in on target and so did initial claims.

The Battle Within

When stocks have been falling or are particularly volatile, investors often struggle with emotions. Some are fearful of losing money and may want to close their investments and go to cash. Others feel like they need to start trading more to try to recover any losses. These emotions are very real and very common. For many people the solution is to not panic but instead back away from the computer or financial news and go for a walk. With that said, there are a couple of things investors can do to make sure they’re managing their money wisely.

First, define your time horizon. If you’re a long-term investor, then you know your job is to ride out the ups and downs, so maintain your focus. If you’re a short-term trader, make sure you’re following your rules and sizing your positions accordingly.  

Second, make sure your long-term portfolio aligns with your goals and risk tolerances. Sometimes we get a few investments that really outperform the markets, and they stick out in our portfolios. These are great. But if they take up too much of our portfolio, they present a major risk if that stock were to fall. This is why it’s important to rebalance your portfolio from time to time to make sure it still reflects your goals and risk tolerance. Rebalancing is simply selling some—not all—of a winning investment and putting the funds into other investments that will bring your risk tolerance and portfolio goals back in balance.  

CHART OF THE DAY: THE SHADOW KNOWS. The S&P 500 (SPX—candlesticks) has been testing its previous October lows or support. Candlestick charts show the difference between the opening price and the closing price within the rectangles. The wicks or shadows show the highs and lows for the day. You can learn a lot about how a day of trading played out by looking at candles. Groups of candles with long shadows often highlight areas of high supply and demand.Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

It’s Okay to Be Average: One way people can continue to invest in a volatile market is to dollar-cast average (DCA). DCA is continuously investing the same amount of money in a security over time, regardless of fluctuating prices, rather than the entire amount all at once.

For example, if you wanted to buy 1000 shares of a stock that’s currently trading at $34 per share, you could break it into five increments of 200 shares to purchase shares at regular intervals. Let’s say you were able to purchase shares at $34 $28 $26, $32, and $30 over a period of time. Your average price per share would be $30. 

There’s a long debate over DCA versus lump sum investing. In fact, we have a video on this very topic, but the short version is that DCA is best in volatile and falling markets. Both have their benefits and risks. But if market volatility is keeping you from reaching your goals, DCA is a good approach.

Finding Your Type: Another tool people use to navigate volatile markets is order types. Many investors use market orders. This type of order indicates that you want your order filled immediately at the next available price. In volatile markets you could get a very different price than the one you were hoping for. If you’re a long-term investor you may not worry so much about the exact price you enter, and a market order might be okay.

If your priority is to buy or sell at an exact price or better, you may want to use a limit order instead. With a limit order, you specify a price and the order won’t be filled until the stock can be bought or sold at that price or lower. However, because of the price restriction, there’s no guarantee the order will be filled quickly—or at all. Investors generally use limit orders when they have a target entry or exit price and are willing to wait for the market to move in their favor.

The last order type is a stop order, which is just a market or limit order with an activation price that triggers the order. When the stock reaches the activation price, the order is executed according to its order type. Stop orders can be used in various ways. Investors can use buy-stop orders to buy securities when they reach the activation price, or they can use sell-stop orders when trying to limit potential loss in an investment.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.