Profiting From a Panic

September, historically the market's worst month, was off to its worst-ever start the first three trading days. Investors were worried about economic growth and European debt problems. The selling was relentless and discouraging for investors, professionals included.

A month ago (August 8), the Dow plunged 635 points and more dramatic declines are certainly possible. They can be great buying opportunities for both stocks and income vehicles. For example, before August 8 the General Electric Capital 5.875% senior note (symbol GED), rated AA+, traded in a tight range of $24.93 to $25.59 since January 1. On August 8 it briefly traded at $22.75 where it was yielding 6.5%, then it quickly rebounded. Nimble buyers nailed down a 6.5% yield in a top-rated issue and quickly added a 10 percent capital gain. Sellers were foolish.

Amid near-panic conditions, securities that trade on light volume can go to fire-sale prices, and wise investors with cash available can seize the opportunity when panicking sellers using market (not limit) orders dump their securities. Those opportunities have often been in preferred stocks I've written about recently, including the Partner Re Preferred E.

What should you buy if panic conditions return? Look to those that recovered fastest in August. Most of the income securities I've been writing about -- far less risky than common stocks -- recovered within a day or two. For example, Western Assets Emerging Markets Debt Fund (ESD) quickly fell from 19.30 to 17.11, then roared back to 19.36. The S&P Utilities SPDR (XLU) plunged to 29.45 then made a bee line to 34.

The bottom line: triple-digit moves are now routine and volatility will be with us for the foreseeable future. When people are selling indiscriminately, oblivious to quality and risk, smart investors will have terrific opportunities in both stocks and income vehicles. But only if they have cash available. Set some aside and be ready...just in case.

— David Vomund is an Incline Village-based fee-only Registered Investment Adviser. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the position mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.