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Investors Must Prepare for a ‘Washing Machine’ Market

Volatility is the name of the game on Wall Street right now, with a lot of the winners from earlier this year now losing momentum, and a host of once-beaten-down stocks and sectors fighting forward even amid bad news.

Louis Navellier, editor of Blue Chip Growth and chairman of the money management firm Navellier & Associates, calls this the “washing machine cycle,” where things get sloshed around like your dirty socks on laundry day. In a recent Marketmail note to clients, he writes that volatility is here to stay — but thankfully, that means the strongest stocks with the best earnings will stand head and shoulders above the rest.

Presuming you can find those stocks, of course!

Here’s what Navellier had to say about stock market volatility right now:

“On the surface, the stock market looks firm, but under the surface it is churning. For example, Apple (AAPL) rallied early last week, leading up to its new iPhone announcement Tuesday night. Then, Apple lost its ‘mojo’ immediately after the announcement. The stock gapped down $25 (-5%) Wednesday morning.

I believe we will remain in this ‘washing machine’ type of market — with lots of stocks sloshing back and forth — until third-quarter earnings announcement season begins early next month.

Here are some examples of the market “agitation” we have witnessed since May 1:

– High dividend stocks as an overall sector were hot through April 30, but many turned cold when interest rates rose.

– As a group, homebuilding stocks were cold through May 14, but many have bounced back dramatically since then.

– Home improvement and appliance stocks as a group were hot through May 14, but many have since cooled off.

So how can you counteract this in today, out tomorrow mentality?

Simple. Navellier says to follow the numbers, particularly sales and profits. He goes on:

“… since August 27, when the S&P 500 hit a near-term low, most of the stocks that have done the best are at the extreme 10% in various fundamental categories we follow. They typically are: (1) the bottom 10% in terms of market capitalization, (2) the top 10% in highest price/earnings ratios, (3) the bottom 10% in terms of dividend yields, and (4) the highest 10% in terms of short interest. In other words, low-priced, low quality names have been leading the way since August 27, as the ‘shorts’ have been getting squeezed.

I anticipate this sloshing back and forth will last until Wall Street refocuses on the upcoming third quarter sales and earnings announcement season, which will reward stocks with stronger fundamentals.”

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Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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