Is volatility really good for online brokers? This question has come up recently as the online brokerage firms discuss what has happened to their volume during the up and downs of the second quarter of 2010. Many investors have opted to get out of their investments rather than watch them go down again like they did in 2008. I know I watched some of my investments decrease by one/half during this period. My investment portfolio did eventually come back in 2009. However, many investors do not have the stomach to watch that happen again. There has been a lot of talk about double dip recession.

The online brokers do have something to say about the outlook of the stock market, and how it relates to their business. Charles Schwab feels that the “worst of the environmental pressure on our revenues is now behind us”. On the other hand TD Ameritrade has cut its fiscal-year earnings forecast due to low intraday volatility and low interest rates. E*Trade indicated that its May volume did increase but was down from where it was the previous year.

There does not seem to be a consensus opinion on where the stock market is going to go. Those investors who feel that the market will turn around may be choosing to invest in online brokerages. This is due to the reward of low commissions and trading costs. If the stock market is going to have volatility, then it would be best to have low trading costs so that the profits from the swings is not eaten up by investment costs. The swing profit may still be there, but could be small. It is possible to make money on the volatility of stock prices if you are able to time it correctly, and you keep your costs down.

The volatility may actually be good for online brokerage firms. Wells Fargo in their analysis of the second half of 2010 feels that the stock market will trade in a range, and that we are in for a bumpy ride. The savvy investor still may be able to make money on their investment strategy if they choose wisely. This may include investing in gold, options or a properly timed swing trading strategy.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

The stock market has certainly had an up and down tendency during the year 2010. I have written some articles about this volatility in the year 2010. With both “finding dividend paying stocks” and the article “predicting stock market returns” I talked about what to do to make profits with the current situation. I also wrote about doing the opposite with “contrarian investing”.

I wanted to discuss further dividend paying stocks. It seems that this selection is even more important with the current situation in June, 2010. We have certainly had a rocky road with our investment strategy. One sector that a person should look into would be the utility stocks. They, like many other sectors, are currently beat up. Yet even with this, they are a good value due to the amount of dividends they pay.

In the June, 2010 edition of Utility Forecaster, the author Roger Conrad discussed his feelings on utility mutual funds. It is his feeling that the managers are doing nothing more than churning their stock holdings to try and make it to the top of the heap. They do not stick around long enough to collect the dividends and they also rack up enormous fees. He feels that an investor can do better if they just trek out on their own. They can do their own research and determine those companies which are the most stable and have a long-term history of paying dividends. Even with this he does have some recommendations on some Utility ETF’s. You can find his article at.. [updating]

There are many different utility and telephone companies which have consistently paid high dividends. One of these companies I found is “CEL” which is actually a wireless telecom company in Israel. Since 2007 they have paid 12 percent dividends. This is not a bad return and with the increase in stock price as a boot, how can you go wrong. The company seems to have some risk since it is based in Israel, and one never knows what is going to happen there. However, the point is that there are other utility and telecom companies which provide these high dividends.

It would be my suggestion that you use a screen filter to find oversold, dividend paying stocks which have a consistent history of paying their dividends. You do need to be careful when selecting your dividend paying stocks. There was a recent article in the Wall Street Journal which discussed dividend paying companies which decided that they would discontinue the paying of dividends due to cash flow problems. You will never actually know if a company is going to experience this problem, but if you look for at least five to ten years of dividend paying history and a good solid company with a believable financial record, then the chances are better than most that they will continue to pay dividends.

The stock market has swings in its pricing. Some of these swings can be quite volatile. It is hard for an investor to watch their investments go up and down. They are euphoric when it goes up and they are patting themselves on the back for being so smart. They are depressed when it goes down and they think they should get out of the stock market before they lose more money. What can we do to measure volatility in the stock market and what does it tell us?

There was an episode on Seinfeld where Jerry and George got a hot stock tip and they purchased stock in a company. The stock price went down a lot and Jerry decided to cut his losses. George decided to ride it out and when the stock price turned around, he was happy that he had stayed with it. Jerry, of course was depressed all over again. He had not only lost a lot of money, but he felt he had actually lost more because of the potential gain he had walked away from.

Any one who has invested for any length of time has a story similar to the one portrayed on Seinfeld. We have all walked away from a winner just to have that stock turn around. What we need to do as investors is to watch the signs and know when it is time to dump and when it is time to stay. The problem is, what coach should we be looking at to get our signs?

One coach that has been developed is the VIX Indicator. The VIX indicator was developed in 1993 and finessed in 2003. It was developed to be a gauge of the market sentiment. A definition of VIX from the Chicago Board of Options Exchange which developed the index states:

“VIX continues to provide a minute-by-minute snapshot of expected stock market volatility over the next 30 calendar days. This volatility is still calculated in real-time from stock index option prices and is continuously disseminated throughout each trading day.”

The VIX measures the amount of volatility in option premiums. Options are a good indicator of what investors think will happen to the stock market. This is due to their leverage investment effect. The VIX is constructed from the weighted average of implied volatility of “at the money” and “in the money” options on the S&P 500 index. This number measures the anticipated percentage movement in the S&P 500 for the next thirty days.

Those who use the VIX indicate that it can inform the investor of when market swings are coming. It is like the baseball coach giving a signal to the runner to come home or to stay on base. The theory is that like the coach, the VIX can tell you things that you would not otherwise know.

Contrarians in the investment world indicate that when the VIX is low, meaning that investment sentiment is satisfied and passive, it is time to sell. They indicate that when the VIX is high meaning the investor sentiment is worried and scared, it is time to buy. The sentiment here is that you should be buying when others are selling and selling when others are buying.

The problem is that the VIX can give false signals. It will sometimes have a certain amount of volatility that is very short-term. Unless you are a day trader, you would miss the opportunities provided when the market suddenly turns upward. There are so few absolutely good days in the stock market, that you need to be invested when they happen. If you are on the sidelines, you will be like Jerry and not like George.

You can see from the graph that the VIX hit the high in October, 2008 but the S&P 500 did not hit its low until March, 2009. If you are on the sidelines, it would be difficult to determine when to come back into the market solely based on the VIX indicator. It had gone down quite a bit before the S&P 500 reached its bottom and started going upward. The massive spike upward in May, 2009 may be an indicator that you should head to the sidelines, but you do not really know for sure.

Still the VIX is one of the coaches sending you signals on what you should do with your investments. The thing is, you should look at other coaches also before finalizing your decision.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.