The month of October tends to have its spooky aspects not only as it relates to All Hallow’s Eve but also in the financial markets. Simply by looking at the monthly absolute changes (both increases and decreases) in the VIX volatility index in October it’s clear that investors are often in for a ride.
Positioning the portfolio in a defensive way may not necessarily be the answer as October can also bring big stock rallies with it. As usual in investing and trading, the answer includes the right/healthy mental approach coupled with a flexible strategy. Over the years I have found that if I am mentally prepared for more volatility into the autumn then I will automatically be better prepared to react. Secondly, instead of going through the exercise of finding the stocks that ‘may’ be safest in a volatile environment I make a list of the stock I simply want to avoid during such time.
As a general theme during the month of October I try to avoid stocks with high betas and/or high implied volatility levels in their options.
The VIX volatility index, however skewed it may be due to certain ETFs and structured products still remains at very low levels. Any move up in the VIX should hence logically affect higher beta stocks more.
Here are three stocks I will steer clear of this month for trading time-frames of five to twenty days:
Green Mountain Coffee Roasters Inc (GMCR) has been plenty in the news as of late and the stock, down near 50% year to date, remains choppy, volatile and incredibly exposed to headline risk. While the stock’s beta is only 1.15 versus the S&P 500, its options implied volatility near 94% is plenty of reason to stay away from the stock during October.
Morgan Stanley (MS) has a relatively high beta of 1.68 compared to most of its peers. Granted a further rally in financial stocks should cause a comparatively larger rally in this stock, but it also works the other way around. Again, given the volatile nature of October I favor the lower beta names within each sector.
PulteGroup Inc (PHM) as well as the entire home-builders group had a great run with the XHB etf up around 45% on the year. PulteGroup Inc (PHM) itself is up around 150% year to date and hence potentially overbought after this vertical move. Overbought and oversold conditions can last for extended periods of time, what is of concern however going into a potentially volatile month is the relative increase in volatility for a stock after such a run. The stock’s current beta of 1.78 means that it moves almost twice as much as the S&P 500 and such could be especially true if a potential directional move would be to the downside and as it relates to the charts out of the sharply up-trending channel.
In summary unless you are an options or day trader it may be at least mentally healthier to stay away from volatile and news-headline driven stocks during the month of October. Until the broader indices have regained a better up-trending direction after the recent pause it should pay to stick with slower moving stocks.