May's Market Panic: Using the VIX Index to Find Hedges
Markets reacted negatively to several different economic reports on Friday. The most watched of them being the U.S. jobs report and China's May manufacturing PMI report.
The U.S. jobs report was incredibly disappointing, revealing that companies added only 69,000 jobs in May, while economists were hoping for 150,000 jobs. The unemployment rate raised 0.1% to 8.2%. The report was contrasted by Bank of Tokyo-Mitsubishi UFJ's Chris Rupkey saying, "At least we don't have to hear about how people are dropping out of the labor force." Instead, the labor force rose 642,000, while only 220,000 of them did not find jobs.
China's manufacturing PMI report for May fell to 50.4 vs. the expected level of 52. HSBC noted that their unemployment rate rose the fastest in 38 months.
Spain, Italy, France, Germany, and Greece all reported levels under 50, though lower levels were expected for countries in the eurozone. A disappointment came from the U.K. though, with a PMI level of 45.9 vs. 50.2 in April and the economist expected 49.7.
Business section: Investing ideas
The market plunged in response to the disappointing reports, due to investors and funds selling off positions to manage risk.
When huge sell-offs occur like on Friday, the VIX index, which is a measure of volatility in the S&P 500, usually jumps. When the market becomes highly volatile, stocks that are positively correlated to it have the possibility of acting as hedges.
Below is a list of stocks that are positively correlative to the VIX index. Do you think they can be good protection for you portfolio?
List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)
1. Vertex Pharmaceuticals (NAS: VRTX) : Engages in the discovery, development, and commercialization of small molecule drugs for the treatment of serious diseases worldwide. Market cap at $12.67B, most recent closing price at $59.50. Correlation with the VIX index at 0.513 over the last 60 days.
2. Nationstar Mortgage Holdings: Designs, develops, manufactures, and markets analog and mixed-signal integrated circuits and sub-systems. Market cap at $4.86B, most recent closing price at $19.17. Correlation with the VIX index at 0.663 over the last 60 days.
3. Dean Foods (NYS: DF) : Operates as a food and beverage company in the United States. Market cap at $2.89B, most recent closing price at $15.60. Correlation with the VIX index at 0.545 over the last 60 days.
4. AOL (NYS: AOL) : Operates as a Web services company that offers a suite of brands and offerings for the worldwide audience. Market cap at $2.56B, most recent closing price at $26.91. Correlation with the VIX index at 0.547 over the last 60 days.
5. Investors Real Estate Trust: Engages in the ownership and operation of income-producing real estate properties in the United States. Market cap at $2.35B, most recent closing price at $27.25. Correlation with the VIX index at 0.58 over the last 60 days.
6. Logitech International: Designs, manufactures, and markets hardware and software products that enable digital navigation, music and video entertainment, gaming, social networking, audio, and video communication over the Internet, video security, and home-entertainment control. Market cap at $1.96B, most recent closing price at $10.11. Correlation with the VIX index at 0.549 over the last 60 days
7. ARMOUR Residential REIT (NYS: ARR) : Market cap at $1.24B, most recent closing price at $6.94. Correlation with the VIX index at 0.523 over the last 60 days.
8. Arena Pharmaceuticals (NAS: ARNA) : Focuses on discovering, developing, and commercializing oral drugs in the therapeutic areas of cardiovascular, central nervous system, inflammatory, and metabolic diseases. Market cap at $1.22B, most recent closing price at $6.60. Correlation with the VIX index at 0.589 over the last 60 days.
9. Papa John's International: Operates and franchises pizza delivery and carryout restaurants under the Papa John's trademark in the United States. Market cap at $1.11B, most recent closing price at $45.90. Correlation with the VIX index at 0.54 over the last 60 days.
10. Standard Microsystems: Engages in the design and sale of silicon-based integrated circuits that utilize analog and mixed-signal technologies. Market cap at $821.1M, most recent closing price at $36.62. Correlation with the VIX index at 0.574 over the last 60 days.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Rebecca Lipman does not own any of the shares mentioned above. VIX data sourced from Yahoo! Finance.
At the time this article was published The Motley Fool owns shares of Dean Foods and Logitech International. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals and Logitech International. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.