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What to Do When Stocks Sell Off

It's Happening...

Written by Briton Ryle
Posted May 7, 2014

If you're looking for signs that the direction of the stock market may be changing, you should watch the little things. Important changes often start off small and then grow into something much bigger.

In March of 2000, former Fed Chief Alan Greenspan hiked interest rates by a half a point. Within a few weeks, companies started missing earnings and lowering their growth forecasts, and the Internet bubble officially popped.

In October 2007, Meredith Whitney predicted that Citigroup was about to cut its dividend. Less than six months later, Bear Stearns was bankrupt, and we were in the midst of the worst financial crisis ever.

So, here's a little thing that may be about to get a lot bigger...

All of a sudden, Turnaround Tuesday isn't working anymore. You see, it's been kind of a running joke for years that stock always rally on Tuesdays.

Pick any other day of the week this year, and stocks have been negative. On Mondays, for example, stocks drop by an average of 0.3%.

But not Tuesdays. On Tuesdays, stocks have been up an average of 0.6%. If we simply got rid of Tuesdays, the S&P 500 would actually be down 8.5% so far this year instead of slightly up.

Last year, stocks rallied every Tuesday from January to June! Five straight months of Tuesday rallies set a record.

But now it may be ending. Yesterday was a nasty Tuesday, with the S&P 500 down nearly 1%. It was the third bad Tuesday this year. So what does it mean if Tuesdays lose their magic touch?

Let me put it this way...

It's been two years since we've seen even a 10% correction in the stock market. That's a long time, and the odds that this bulletproof stock market can keep this record run going are getting longer by the minute...

Or let me put it his way...

It's the start of May — the month where traders are supposed to follow the old adage, “Sell in May and Go Away” — and it looks like traders are selling...

Sell in May?

Are you surprised? After biotech and tech stocks have been thoroughly routed so far this year, is it a shock to see the selling spread to sectors of the stock market that haven't?

This is the time I take solace in The Wealth Advisory's portfolio. Made up of top income and dividend stocks, this portfolio is a rock in uncertain times, a beacon in the fog.

And it's very simple to see why. Income investors aren't traders. We don't agonize over whether stocks will rally this Tuesday or next.

We just cash dividend checks. And we're not going to be doing that “Sell in May” thing either, because if you sell the stock, they don't send you those checks anymore...

No wonder dividend and income stocks stay far more stable than the Twitters and Amazons of the world. In fact, dividend stocks are the only reliable way to make money in the stock market because they pay you to own them — and the good ones pay more and more as time goes by.

There's a ton of research on this subject. I guess some people thought it would be a good idea to find out which stocks historically make the biggest gains. And while there are always going to be examples of stocks like Netflix running from $35 a share to $350, these stocks are not always easy to find.

For every Netflix, you're going to get a few Groupons. Groupon may have seemed like a good idea when it IPO'd at $25 back in 2011, but it doesn't look so great today at $6.72 a share.

Anyway, a couple years ago, acclaimed investor and researcher Robert Arnott conducted one of the most comprehensive market research projects ever. He compiled stock market data for 200 years (1802-2002) to determine the best way to profit.

And what he found was amazing — only 8% of stock market gains come from rising valuations... but 74% of investment returns from the stock market come from dividends!

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The Fed Did It

Where would the stock market be without the Fed's quantitative easing? Many investors believe the low interest rates brought on by QE are causing distortions. Trouble is, it's hard to pin down where these distortions are.

I think they might be found in earnings.

Right now, the trailing P/E for the companies in the S&P 500 is around 18, which is maybe a point or so on the high side of its historical average...

That's doesn't sound like a “bubble” valuation for stocks. After all, the P/E for the S&P 500 was 35 in 2000, right before the market crashed.

But where would the current P/E be without the Fed pumping billions into the economy every week? Where would corporate earnings be if interests rates were higher and companies had to pay more to raise funds?

There should be no doubt that companies have been able to raise a lot of money at very low rates. This has to have a positive impact on earnings. And so investors should be wondering just how reliable earnings and P/E ratios currently are.

And now that the Fed is removing QE, we're going to find out exactly how bad these earnings distortions are...

Bigger and Better Dividends

To me, the strategy for this market is simple: get the biggest and most reliable dividend you can. That incoming cash can make a big difference when/if this market starts really selling off.

Over the last three months, I've helped some investors take a 20% “dividend” from one of the cheapest stocks on the market. And they will likely take another 20% in the next three months.

From an entry price of $4.60 a share, they've already had the opportunity to take $1.05 a share in cash. That works out to a 20% special “dividend” from this stock. And I don't think it will be hard to generate another $1.05 over the next few months.

There's nothing like getting paid to wait for a stock to move higher while protecting yourself from the downside. It lowers your risk and provides cash that can be used for other purposes. Find out how you can do this here.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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