Daily Gains Letter

Market Risk Rising; Where to Invest for the Best Potential Return

By for Daily Gains Letter |

Market Risk RisingDon’t let the new records by the Dow Jones Industrial Average and S&P 500 trick you into thinking everything is fine in the stock market.

Just take a look…

We have the rising military actions against ISIS in Syria and Iraq that involve five Arab countries, which could really increase the geopolitical risk worldwide.

China is continuing to deliver muted economic results and suggested there would be no additional monetary stimulus at this time. Meanwhile, the slowing in the eurozone and Europe, given the economic sanctions on Russia, will impact the demand for Chinese-made goods.

And while the domestic economy is holding, the Organisation for Economic Co-operation and Development (OECD) recently cut its gross domestic product (GDP) growth estimates for the United States to below two percent this year.

The Federal Reserve is helping to support the stock market via the likely extension of its near-zero interest rate policy into mid- or late 2016, but this will help only so much.

The stock market risk is evident on the charts.

Technology and small-cap stocks are attracting the most selling, with investors dumping high-beta stocks as overall stock market risk rises.

The small-cap Russell 2000 lost 1.6%, moving back below its 50-day and 200-day moving averages (MAs) on Monday. The index is now down nearly four percent in September. Considering the risk, I would be careful when looking at small-cap stocks in the stock market at this time.

Technology is also at risk in the stock market despite the NASDAQ continuing to lead the major indices this year with an advance of close to nine percent. Higher-beta stocks are generally the first to be sold in the event of increasing stock market risk.

Even lower-beta stocks are showing risk in the stock market. The S&P 500 fell back below 2,000 for the second time, which is a concern.

Continued stalling on the charts could inevitably result in a bigger stock market correction, based on my technical analysis.

We are seeing some capital shift into blue chip stocks, which are the proven long-term winners. Some would argue to buy bonds, but with the 10-year yield at a low 2.55%, I would rather stick with blue chip stocks.

The DOW is up 0.43% in September, versus a 3.86% decline for the Russell 2000 and a 1.16% decline for the NASDAQ. The S&P 500 was down 0.46% as of the end of Monday.

The average dividend yield on the 30 DOW blue chips currently sits around 2.41%. (Source: “Dividend Analysis,” indexArb web site, last accessed September 22, 2014.) In addition, you also get the capital appreciation potential of the stocks. Compared to a 10-year bond with a 2.55% yield, these blue chips offer a more attractive investment opportunity.

If you want the top-yielding DOW stocks, take a look at AT&T Inc. (NYSE/T), Verizon Communications Inc. (NYSE/VZ), Pfizer Inc. (NYSE/PFE), Intel Corporation (NASDAQ/INTC), and Chevron Corporation (NYSE/CVX). The yields are higher here because the stock price has lagged.

The top blue chips include The Boeing Company (NYSE/BA), General Electric Company (NYSE/GE), Johnson & Johnson (NYSE/JNJ), The Coca-Cola Company (NYSE/KO), McDonalds Corporation (NYSE/MCD), The Procter & Gamble Company (NYSE/PG), Wal-Mart Stores Inc. (NYSE/WMT), and Exxon Mobil Corporation (NYSE/XOM).

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