Market analysis

Defensive Stocks

Defensive stocks are considered to be an important component of an investor’s portfolio. The assets are used to mitigate risk and exposure levels. However, many traders are unaware of what stocks are and as to whether defensive stocks have a place in the CFD trading market? This is what we are going to look at as part of today’s article.

Bullish vs Bearish – Defensive Stocks

Defensive stocks are known to be assets that, for a certain period of time, provide consistent dividends to their shareholders and a stable price compared to the rest of the stock market.

However, traders should keep in mind that stocks can earn the reputation of a defensive stock as well as lose it. For example, Philip Morris is a stock that is known to have lost its title as a Defensive stock over the past 4 years.

A traditionally well known and established defensive stock is Procter and Gamble. The stock has established itself as a defensive stock due to the lower levels of volatility as well as its resilience in times of turbulence.

For example, during the latest stock market crash in March of 2020, the stock declined by 19% compared to the NASDAQ which declined by 30%, the SNP500 which declined by 32% and the Dow Jones which declined by 35%.

The market will also look at the company’s layout and industry when taking into consideration whether or not the stock will be considered as a defensive stock. For example, Procter and Gamble have been known to mitigate risk across different industries including beauty products, healthcare and even food/beverages.

CFDs – Defensive Stocks

Defensive stocks are still known to be volatile but much less so compared to other stocks. This has both its benefits and disadvantages. The benefits relate to its performance during times of uncertainty, general price stability and higher certainty of stable dividend payments. Whereas the disadvantages can be related to lack of potential growth in terms of the price.

Whether or not defensive stocks can be beneficial for CFD traders will depend largely on the individual’s strategy and methodology.

For example, a swing trader who is looking to keep trades open overnight may not be able to consider defensive stocks as the movement will be minimal compared to overnight fees. Whereas a trader who is scalping or using Mean Reversion may be more strongly attracted to defensive stocks due to the nature of the price movement and clearer intrinsic value.

Latest Stock Market Developments

With regards to Procter and Gamble which we have already mentioned, in the third quarter of this year, the Earnings per Share were $1.61, topping the predictions of The Wall Street analysts by $0.02.

Revenue amounted to $20.34B, which is 5.28% higher than last year’s figure and higher than the market forecast by $445.2M. According to reports, the number of hedge funds that owned shares in the company mounted to 69. Last week, Morgan Stanley analysts raised the target price for the instrument to $161 per share.

Towards the end of November and last week, the equities markets saw a strong decline both in the US and other regions. When looking at the main US Indices we can see the declines mount to around 5%.

As prices decline there is the possibility of the price finding support from traders buying at a more competitive price or trying to buy the dip.

The price since the decline has fully corrected upwards regaining previously lost ground. However, some economists remain unconvinced. According to both Goldman Sachs and Bloomberg, the stock market has many challenges ahead, especially individuals who will in the imminent future look to buy further dips.

According to reports, the market remains at an elevated risk from a more hawkish Federal Reserve as well as the new Omicron variant.

If the Federal Reserve remains hawkish in the longer term and chooses to act against the high inflation, it is likely to be through tapering the Quantitative Easing Program. Reducing the QE program can result in a lower supply of capital within the economy, lower demand as well as a domino effect on interest rates. In other words, this could trigger bank interest rates to potentially rise.

We can see throughout the post why traders may consider defensive stocks as part of their portfolio or as part of their trading plan when trading CFDs.

The latest market developments give a clear indication that both bullish and bearish price movements are possible in the immediate future. Therefore, defensive stocks may come into the spotlight once again.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.


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