Investing in a Range-Bound Market

What do you do when equity markets are highly volatile within a relatively narrow trading range as a result of low levels of investor confidence?

Keep a foot in both the contrarian and momentum camps.

For contrarian plays, identify the stocks with the most depressed valuations. Many are cyclicals. As a group, the 20% of US stocks that are most volatile (as measured by sensitivity to market beta) are selling at among their lowest multiples in 40 years. I see particularly rich opportunities in industries such as media/advertising, semiconductors and life insurance, as well as select capital-equipment firms. But investors must have the patience to wait for the rebound in cyclicals.

The catalyst for the rebound is uncertain. A resolution of the European debt crisis, a more accommodating monetary policy in China and a pickup in corporate acquisitions are some of the possibilities.

The timing of the rebound is highly uncertain as well. But don’t wait for clear evidence of a cyclical resurgence before committing funds. By then, much of the expected earnings gains are likely to be priced into the stocks. You’ll miss the boat.

For momentum plays, stocks likely to continue outperforming in this climate of anxiety, you could invest in those that are less sensitive to the economy and that offer safe and rising dividends. But be careful: the 20% of market stocks with the highest dividend yields, which are heavily represented in the defensive consumer-staples, utilities and telecom sectors, are so prized for their high income and (relatively) low volatility that they have become as overpriced as cyclicals are cheap (see my earlier article on crowded trades and the Display below). Valuations Hit Extremes for Cyclicals and High-Dividend-Yield Stocks

But there are many high-dividend stocks in the energy, healthcare, and defense sectors that are selling at much more reasonable valuations. In energy, for example, investor unease about the future price of oil has generated an array of attractively valued stocks, in my view.

Many investors in today’s market have been paralyzed into inaction. I think they are likely to pay a high price in lost opportunity.

This article first appeared on as part of its Global Market Thought Leaders section. The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AllianceBernstein portfolio management teams.

Vadim Zlotnikov

Chief Market Strategist; Co-Head—Multi-Asset Solutions; Chief Investment Officer—Systematic and Index Strategies
Vadim Zlotnikov is Chief Market Strategist, Co-Head of Multi-Asset Solutions and Chief Investment Officer for Systematic and Index Strategies. As Chief Market Strategist, he provides macro and quantitative research that helps identify thematic investment opportunities. As Co-Head of Multi-Asset Solutions, Zlotnikov manages the development and implementation of integrated investment portfolios for the retirement, institutional and retail markets. As CIO for Systematic and Index Strategies, he is responsible for ensuring that individual products meet investment objectives. Zlotnikov served as CIO of Growth Equities from 2008 to 2010. From 2002 to 2008, he was chief investment strategist, responsible for developing portfolio recommendations for the US market and for separate quantitative analysis and money-management research products. Prior to that, he was an analyst covering the PC and semiconductor industries; he launched the technology strategy product in 1996. Before joining the firm in 1992, Zlotnikov spent six years as a management consultant with Booz Allen Hamilton, where he conducted a broad range of strategic and operational studies for technology companies. He also worked for Amoco Technology Company as a director of electronic ventures and spent two years as a research engineer with AT&T Bell Laboratories. He has been named to the Institutional Investor All-America Research Team in the semiconductor components, strategy and quantitative research categories. Zlotnikov holds a BS and an MS in electrical engineering from the Massachusetts Institute of Technology and an MBA from Stanford University. Location: New York

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