5 Low Beta Stocks To Protect Your Gains

The Dow set new records on Tuesday but the two other major benchmarks closed in the red, following dismal results from Netflix (NASDAQ:NFLX) . Market watchers seemed pensive ahead of further earnings, which are likely to determine the course of market movements in the near future. But the big question at this point is, is the recent set of market gains petering out?

Though it is difficult to predict whether this will indeed happen, it may be a good idea to protect the gains you’ve made recently. The best way to do this would be to add low beta stocks to your portfolio. Beta measures the tendency of a stock's returns to respond to market swings. And this type of stock would be your best bet to protect yourself from potential losses.

Record Winning Streak for the Dow

The Dow ended in the green for the eighth consecutive session on Tuesday following Johnson & Johnson’s (NYSE:JNJ) commendable quarterly performance. The health-care giant beat expectations and raised its guidance for the year, which eventually helped the Dow post its longest winning streak in three years.

Reports that McDonald’s (NYSE:MCD) is teaming up with Nintendo also led the blue-chip index higher. The S&P 500 and the Nasdaq, however, closed in the red as investors digested a sharp drop in Netflix’s shares and lowered expectations of global economic growth.

Is the Rally Running Out of Steam?

At this point, the market’s fear gauge, the CBOE Volatility Index (VIX), has fallen to 11.62. This is usually a sign that all is well with markets, and downsides may not be awaiting investors in the near future. However, one point of view is that market sentiment is at an extraordinarily low level.

These market watchers are utilizing a measure called the Hulbert Nasdaq Newsletter Sentiment Index. This is a gauge utilized to measure the desirable level of average equity exposure to time markets in the short run. Since this particular benchmark is the quickest to respond to investor sentiment, the index is usually the most sensitive gauge of the market’s mood.

A week after the surprise Brexit vote, the average had fallen to -55.6% which indicates a larger level of short-term equity holdings are being shorted. This indicates a substantial level of pessimism. Now, despite the record busting run of the stock markets in recent times, the gauge is at 77.8%. This means that a sudden and substantial shift has taken place in terms of market sentiment.

The moot point here is that swings in market sentiment now take weeks, not months, as was the case earlier. And this level of excitement about the markets, a complete turnaround from June end, can only mean one thing. The going could be tough in the weeks ahead.

Our Choices

The record busting run for markets may have reached its end, feel some investors. Even though you could think that is a somewhat pessimistic view, it may be a good idea to shore up your markets against any possible downside.

This is why it would be better to pick safer bets at this point. In such a situation, picking value stocks with low beta would be a good option. At the same time, it would be a good idea to pick winning stocks, in case the rally continues, even after a few hiccups.

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Written By: Zacks Investment Research