Benchmarks have staged an impressive recovery over the last two weeks. But for a slip by the tech-heavy index in the first week, stocks have made steady gains. However, volatility continues to threaten the bull run. Now, a note from Bank of America’s wealth management unit, Merrill Lynch, says that a relatively less popular gauge of volatility indicates a sell-off may not be far away.
The VXV/VIX Ratio
Most investors are familiar with the VIX, which measures expected volatility in the S&P 500 over a period of the next 30 days. This is calculated using prices of options listed on the S&P 500. The VXV is also computed using the same method, but measures expected volatility over a longer period, the next 93 days.
According to Merrill Lynch technician MacNeil Curry, a comparison of the two is an important indicator of volatility. Curry says that markets closed on Thursday and Friday on a note where the VXV/VIX ratio was above 1.2. He goes on to say: “Historically, the market has struggled to hold its gains when this ratio closes above 1.2.” Following Tuesday’s close, the ratio stood at 1.16, which is also unfavorable. However, Curry remains bullish about the index overall.
The VXV is used by traders to determine where the VIX is headed. This is the basis on which it was created in 2007. In Mar 2012, the VXV/VIX ratio touched its highest level of 1.41, a result of the VIX falling to its lowest level in years. After two months, the VIX had gained 54% while the S&P 500 had lost 5.7%.
Low-Priced Dividend Stocks
A soft start to the earnings season has raised the specter of higher volatility. A long and largely consistent bull run has added to speculation of a sell off. Meanwhile, oil prices remain volatile and the dollar continues to gain strength. All these factors point toward rising volatility.
In this environment, low-priced stocks offering high yields make for good choices. These stocks offer higher income in the current low-rate environment but also provide a cushion against equity market risks. Moreover, dividend stocks are historically less volatile than non-dividend stocks and are proven outperformers over the long term.
These stocks are a safe bet to create wealth, as the dividends generally act as a hedge against economic uncertainty. Moreover, these stocks provide downside protection by offering sizable yields on a regular basis.
However, there is a trade-off between low-yield stocks which pay consistent dividends and high-yield stocks that could bring in fast cash but are not very consistent. This is where low-priced stocks come in. Stocks under $20 reap huge profits as an increase of as little as a dollar in share price adds 5% to the portfolio.
Moreover, most of the low-priced stocks have high levels of liquidity that give these stocks an added advantage. This means investors could easily get their money out of the securities. In fact, trading in higher average daily volumes keeps the bid/ask spread tight and does not lead to extra costs for the investor.
Our Choices
To select stocks that are trading under $20 and offering high yields, we screened the following 3 stocks that carry favorable Zacks Rank. Also, with our new style score system we have identified the key statistics to pay close attention to and thus which stocks might be the best for value investors in the near term.
The Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that, stocks with Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2, offer the best upside potential.
Based upon the above criteria, we have selected three stocks that could be promising picks. Not only do these stocks have a favorable Zacks Rank but also a value score ‘A.’
Hatteras Financial Corp (NYSE:HTS) is an externally-managed mortgage real estate investment trust. It invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or U.S. Government-sponsored entities.
Hatteras Financial holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘A.’ The company has dividend yield of 10.8% and its last closing price was $18.55.
Western Asset Mortgage Capital Corp. (NYSE:WMC) is focused on investing in, financing and managing primarily residential mortgage-backed securities for which the principal and interest payments are guaranteed by a U.S. Government agency or federally chartered corporation.
Western Asset Mortgage Capital holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ The company has dividend yield of 18.4% and its last closing price was $14.56.
Anworth Mortgage Asset Corp. (NYSE:ANH) is a U.S.-based REIT. The company invests and finances residential mortgage-backed securities, which are guaranteed by Ginnie Mae or Freddie Mac and Fannie Mae and other government backed agencies.
Apart from a Zacks Rank #2 (Buy), Anworth Mortgage has a Value Style Score of ‘A.’ The company has dividend yield of 11.5% and its last closing price was $5.22.
Until the Fed provides clarity on interest rates and the volatility in oil price ceases, markets will continue to face severe downside risks. The long-term view of markets remains positive, but in the current environment these stocks may be good choices for investors.