Using High Dividend Yields to Find the Best Stocks in a Bear Market

When you trade for a living like we do, it's easy to lose sight of the fact that the stock market is not a zero sum game. When the average investor goes out and plants his flag of support and says that he's buying company X's stock, he's saying that he believes in the company and that the company's success will also mean his success (i.e. everybody wins). This is not true in the world of stock options where the rules are clearly designed for it to be a zero sum game. That means that for every investor that gains, there's an investor who loses the same amount. So, what does this have to do with high dividend yields and using them to find today's best stocks? Quite a bit, actually. You see, a lot of our trades, especially at the pro subscriber level, are designed to take advantage of the zero sum game, while gleaning hints and clues from the average investor who's playing the non-zero sum game.

When uncertainty hits the markets, whether it be for geo-political reasons or changing fundamentals, stock investors look for safety. That safety sometimes can be found in the comfort of quarterly dividend cheques and, oh, how people love those dividend cheques. So, how do you trade this? Well, one of the strategies that we use (and, we can't share all the details with you here as our system triggers are based on a set of complex variables) is to closely track the VIX, which is an index of the implied volatility of the S&P 500. When it reaches a certain level (it's somewhere above 22.6 and below 31.9), we begin looking at price action for high-dividend yield stocks. Now, when we say high-dividend yield, we actually mean "reasonable" dividend yield (i.e. 3-7%) but high compared to the 10-year note and other relatively safe fixed income instruments. From our highly customized technical indicators, we can see where the price action truly is.

As markets begin to gyrate, it's not only the small individual investor that looks for a safe haven but the big institutional investors do the same. This is where a careful analysis of price action allows us to pick the best stocks as there are a lot of what we refer to as "RUD" (Run-up's done) stocks. These RUDs may show serious price action in a stock such as Philip Morris (PM), which is a notorious high-yield offender. However, by the time an average investor studies the charts and makes his decision, most of the run-up may be over, thereby nullifying any of his perceived advantage. Therefore, you need to study these charts and study a lot of them to be able to determine which still have room to go higher and which are RUDs in a tense market.

It's not easy to find the best stocks all the time, especially in an uncertain market. However, closely tracking the VIX and combining it with analysis of price action in high-dividend yield stocks can help you tip the scales in your favor and help you find the best stocks the trade.

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By: TradingWins Team

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