Understanding 2009 Stock Market Volatility

Market volatility, as measured by options action, reached nauseating levels in 2008.

But as you brace for big swings in 2009, get set for major profits, too.

To take full advantage of volatility, you have to know how it's measured. Here we'll look at the broader VIX "fear gauge" and at beta, which is an individual-stock volatility stat.

Keep in mind that "the market" isn't some kind of Ouija board. Just scan a listed company's profile in Yahoo! or Google Finance to see insider ownership changes, options volume and, of course, share price movement. You basically know who's doing what and how much money is moving.

If you know too much too soon and move based on that, you can land in the clink... So, information is a tightrope we all tread to take eventual gains, and volatility is a big part of that.

Above all, it's options volume that investors hone in on to gauge volatility and investor fear. In 2008, the Chicago Board of Options Volatility Index―the VIX―rocketed to a high level of 80 in both October and November. That VIX measure reflects a record options trading volume of 1.19 billion for the year, based on S&P 500 index options.

Right now, the VIX is sitting at just below 40.

This halving of the VIX in the past eight weeks signals stabilization and cautious optimism about the beginning of Barack Obama's tenure. A combination of billions in infrastructure spending and newly-announced tax cuts that will garner more GOP support may restore vibrancy to American and international balance sheets.

Yet we expect some volatility to persist in the form of double- and triple-digit percentage swings in stock prices throughout the world.

Beta as a Stock Volatility Measure

Now for more of an apples-to-apples comparison of volatility, we can use beta.

Beta measures U.S-listed stocks and funds by their deviation from the S&P 500. As such, it's a relative measure and not an absolute one. A beta greater than 1 means the stock or fund you're looking at is more volatile than the broader market. A beta below 1 means it's steadier than the S&P.

Current trading conditions, however, do require that you maintain a relative perspective as you prune and fertilize your portfolio... If you have a stock down 20% over the past year, keep in mind that the S&P has lost nearly 35% in the same period. If you're seeing relative gains in a company you believe in, especially one with solid recovery prospects specific to the stimulus packages being unleashed (think renewable energy, infrastructure, etc.), you're in good shape.

Beta will capture such exceptional performance to the upside, as well as any deeper troughs the shares might have dug compared to the benchmark.

Watching international stocks and ETFs, I like to use beta to filter out global stocks that are either too aggressive or just aggressive enough for my portfolio risk appetite. Beta also helps keep things in perspective over the longer term.

Take the iShares MSCI Emerging Markets Index ETF (AMEX:EEM), for example:



As you see in the above chart, for a good 18 months the EEM soared up, up, and away from the S&P. That gave EEM a higher beta, which was a boon to investors who were long the ETF.

The "dark side of beta," however, came in the form of more severe losses as the S&P turned into a falling knife. Beta then became a bane, and many EEM holders retreated to safety in treasuries, gold, and cash.

EEM's beta is right around 1.75 at the beginning of 2009, borne out by a 17% gain in the past month vs. the S&P's 6%.

We're still nowhere near the levels we saw through mid-2007, but keeping volatility in mind could clue you in to possible bubble levels and get you out with profits at the top... As well as tipping you off to oversold positions that lead to market-beating bounces.

Now is the time to build positions in a few higher-beta stocks and ETFs for supercharged gains in 2009. But watch the VIX too, and always remember that volatility works both ways.

 

The Bull Run in Infrastructure: Game On

Look at these deals:

• Calgon Carbon wins $5M drinking water contract in San Francisco

• Insituform lands $13M in Atlanta sewer work

• Jacobs Engineering announces 3 projects

• EnerNOC signs 50 megawatt contract with Salt River Project

There are a few common threads that stitch these, and many other recent deals, together.

First, they're all infrastructure-related projects, either for our water or power grid systems.

Second, all the companies mentioned are publicly-traded, have been climbing in light of the news, and have made investors in the know a nice chunk of change over the past week or so. I'm talking 20% runs in some cases.

Third, all of these infrastructure stocks, and many more, will continue to rise in 2009 in step with the progress of the massive infrastructure stimulus package now being hashed out by Congress.

The time to load up is now, as Congress went back to work yesterday and is promising no less than a $750 billion aid package to be ready to sign in about a month's time.

Floods Cause Damage, Profits

The plan, called the American Recovery and Reinvestment Plan, is being hailed as both good politics and good policy. Some of the money will go tax breaks for millions of working Americans, but a large chunk will be aimed at "shovel-ready" infrastructure projects that will solve serious problems while getting people back to work.

You see, in any given year, about 250,000 water main breaks occur in North America. Most of our water pipes date back to WWII or prior; some of them are even wooden.

Our failing water system causes billions of dollars in damage each year via floods, accidents, road damage, and power outages.

According the American Society of Civil Engineers (ASCE), the country needs about $12 billion annually to "replace aging facilities and comply with safe drinking water regulations." The Federal budget allowance, at about $850 million, is less than 10% of the required total.

The coming stimulus is aimed at filling that funding void. As Federal money is freed up, we'll begin to see dozens of new projects like those listed above. Related stocks will rise as fast as the projects are announced.

So pouncing on the right water companies now, like readers of the Alternative Energy Speculator have been doing, will pay off handsomely in the new year, and down the road.

Infrastructure Stocks: Blackouts & Bull Runs in 2009

Our electric infrastructure isn't any better.

The power grid is slow and outdated. Utilities still use wall maps and pushpins to find the exact location of a power outage. But new, intelligent equipment, will alleviate that by communicating outages and maintenance needs wirelessly to a utility's headquarters.

There is also not enough transmission capacity for surging demand, which leads to blackouts and brownouts on hot days when air conditioners are cranking.

Renewable energy has also presented a problem for the grid. The best locations for wind farms and solar parks are remote, sometimes hundreds of miles away from the nearest power line.

Part of the coming multi-billion stimulus will also go to upgrading the grid. New transmission lines, energy efficiency projects, and smart grid technologies will all be on docket to receive government cheese.

In its most recent "Infrastructure Report Card," the ASCE noted, "investment in transmission lines during the next 10 years is expected to be $3 billion to $4 billion per year, while the line-miles of transmission added will be only one third the rate of electricity demand."

As you can see, $4 billion per year simply isn't enough. But billions more are being freed up, and are about to be delivered.

Public companies getting that funding are also going to be Wall Street darlings this year as a massive bull run in infrastructure gets under way.

I've compiled a brand new report so that my readers can play it for all it's worth. To coincide with the report, I recommended 10 new infrastructure stock plays guaranteed to pay off in the next few months.

The Water Sector: A Bull with Growing Horns

By Nick Hodge
Wednesday, December 31st, 2008

Get this:

In trading earlier this week, several water companies got off to a great start. Midway through trading on Monday, Northwest Pipe (NASDAQ: NWPX), Layne Christensen (NASDAQ: LAYN), Gorman Rupp (AMEX: GRC), and Badger Meter (NYSE: BMI) were all showing sizable chunks of green.

Yet other water industry stalwarts, like Consolidated Water (NASDAQ: CWCO), Met Pro (NSYE: MPR), and Southwest Water (NASDAQ: SWWC) were getting hammered―down 10% or more.

This goes to illustrate the wacky way in which the market continues to move. Usually, an entire sector moves in one direction, but with nagging credit limitations and an ongoing recession, traditional rules no longer apply.

It takes a little more research and guidance to come away with profitable long positions in this market. Simply knowing a sector is bullish―like water in this case―is no longer enough to profit from it.

Indications of a Water Bull

The evidence is all around.

A Google News search for the term 'water' generally reveals numerous stories on why the water industry needs so much financial attention.

Here are some headlines from a similar search I conducted earlier in the week:

• More Cracks Found in Burst Maryland Water Main

• EPA says coal ash spill dumped metals in water

• Tampa Region Likely To See More Water Restrictions

• Water line breaks at Wash. police department

• Birmingham to increase water prices

Hundreds of headlines like that are repeated daily. Those mentioned above were just the top results from a one-day search. Even so, those five headlines paint a perfect picture of why the water industry is ripe for investment.

1. Water infrastructure is crumbling

2. Pollution is threating water sources

3. Water scarcity is rampant

4. Price is going up to offset reduced supply and increased demand

What more could you ask for as an investor? The water sector is calling out to us.

Make it Rain Profits

If there is anything else you could ask for, it's probably direct government investment in the water sector. Well ask, and you shall receive.

Congress, along with President-elect Obama and his cabinet, is currently drafting a new economic stimulus with a reported price tag over $850 billion.

Of that sum, $300 billion will be earmarked for infrastructure investments, with a focus on electric and water infrastructure.

That should serve to make the horns on this water bull just a bit longer.

But as I said, simply knowing a sector is about to take off―even with government backing―isn't enough to profit from it.

Consider the following example:

Consolidated Water (NASDAQ: CWCO) is a major water utility with desalination operations in the Caribbean. It's a long-time investor favorite, and a likely candidate to prosper from the water bull.

Insituform (NASDAQ: INSU), is a lesser-known pipe rehabilitation company, and also a potential play in the water sector.

In early October, Consolidated Water was trading around $17.00. Insituform went for about $15.00.

Today, Consolidated Water goes for about $11.30 while Insituform has soared to $19.40. Here's the chart, with the Dow thrown in for good measure:

The DOW is down nearly 40%. Consolidated Water took a 60% hit. But Insituform is up over 20%, over the past six months, and I think it's headed higher.

That's why I recommended purchasing shares of Insituform to thousands of readers of my Alternative Energy Speculator. They're enjoying all the upside the water market has to offer without the downside, because they get thoroughly researched recommendations delivered directly to their inbox.

And we're sitting on three other water plays that are about to take off, with plenty more to come.

Truth is, I think 2009 is going to be a very lucrative year for water stocks. And if that's the case, my readers are in for some serious profits.

Not to brag, but here are some of the returns my water index offered in 2008:

• Tetra Tech (NASDAQ: TTEK), 65%

• Lindsay Corp. (NYSE: LNN), 302%

• Calgon Carbon Corp. (NYSE: CCC), 273%

• Flowserve Corp. (NYSE: FLS), 185%

And that was during a year we'd all like to forget.

But a new day is emerging, and I have the insight and research to deliver winner after winner (like I've been doing) in the water market.

That's why I want you to come along. And I want you do it at a discount.

You see, 2009 is going to be a blockbuster year for water infrastructure and clean energy stocks. The profits will be rampant, but with a growing sector and hundreds of companies to cover, more research and traveling is now needed to secure legendary gains for my readers.

That's why, after nearly a year, I'm forced to raise the retail rate of the popular Alternative Energy Speculator to $499.

But today, as a special year-end discount and in anticipation of the money that will be made in 2009, I'm offering a one-time discount price of $149.

This will be your last chance to purchase the Speculator at a rate below retail, and you'll also get my new book, Investing in Renewable Energy, absolutely free.