Whipsaw: a violent move in a stock’s price that forces weak hands to sell, and is later followed by a sharp rebound, often to new highs. That’s the unfortunate experience more than a few investors have had recently in high-yielding stocks, including Canadian trusts and corporations.

Atlantic Power Corp (TSX: ATP, OTC: ATLIF) is the single recommendation I’ve received the most queries from readers about. The owner of power-plant and power-line assets is still trading at nearly three times its late 2008 low and has returned more than 133 percent over the past 12 months.

Because of the complexity of its ownership arrangements, Atlantic won’t release its fourth-quarter earnings until after today’s close. But given the results of its customers–almost all of which are regulated utilities–its plants are still running well and generating cash flow, even as the company nears a listing on the New York Stock Exchange that promises to broaden its popularity in the US.

This apparent steadiness, of course, has done little to calm investors. The volatility hasn’t approached what we saw in early December, when shares repeatedly rocketed between USD9 and nearly USD12 over a two-week period before heading well north of USD12. But the ratcheting around has still raised questions about Atlantic’s ability to hold its current range and whether or not it’s still a safe stock. And similar questions have been raised about other Portfolio members that have scored big gains but are suddenly showing downside volatility.

Unless you’re a skilled short seller, odds are you don’t want to live through another 2008-style crash. I certainly don’t. But two things here need to be pointed out.

First, the Canadian dollar has been on fire of late and was due for a pullback, which may be ongoing. That directly affects the volatility of these stocks, which are priced in Canadian dollars.

Second, at least in Atlantic’s case, all of the recent volatility has taken place above my buy target of USD12. That’s the price where the stock yields just shy of 9 percent. I haven’t increased my buy target because I want to see earnings numbers that justify such a move first–and I’ll have to fully digest fourth-quarter and full-year numbers before making that decision.

It’s entirely possible that Atlantic’s numbers will be disappointing and the share price will come down further this week. Should that occur, I’ll have to make a decision about whether the stock is still worth holding–and we’ll have details later in the week in Maple Leaf Memo and a follow-up Flash Alert.

But this is fundamentally an income stream, and any decision about whether to buy, hold or fold needs to be based on business results, not speculation on what share volatility means.

That goes for any other trust or corporation that has become more volatile lately. After all, these are companies that have just weathered the worst credit crunch/recession/bear market in 80 years. Moreover, as we’ve pointed out in MLM, the Canadian economy is starting to pick up steam. Investors’ anxiety about the US economy and market is rising. But the macro risks to our Canadian picks’ distributions are in full retreat. If you’re an income investor, you have no business giving up now.

Volatility: One Explanation

In Utility Forecaster and MLP Profits, I’ve written several times recently about the potential for trailing stop-losses to trigger vicious whipsaws in individual stocks. That looks suspiciously like what’s happened to Atlantic and other high-yielding stocks recently.

Mainly, a lot of people with big profits in these stocks have placed trailing stop-losses. Stops are automatic orders to sell stocks when a particular price level is reached. Trailing stops continually raise the sell level the higher a particular stock goes.

In a calm market stops will rarely be executed unless there’s a major development. Moreover, they’ll normally be executed at or at least very close to the price they’re set. In other words, if you have a stop on Advantage Oil & Gas (TSX: AAV, NYSE: AAV) at USD6 and the share price goes down to that level, you’ll get out at USD6 or thereabouts.

But what about in a volatile, fear-drenched market like this one, with so many investors afraid of being left out but terrified of another 2008? In such a market, many more people are using what they think are risk reduction techniques, like stop-losses and trailing stops.

Suppose, for example, that investors representing 50,000 shares of Atlantic Power, roughly a seventh of Friday’s volume, were using a 10 percent trailing stop on Atlantic. When the stock hit its March 19 high of USD13.55, those stops were raised to approximately USD12.20. If Atlantic were to hit that level for any reason, sell orders for 50,000 shares would come on the market at once. The result would almost certainly be an immediate and steep decline, followed by an immediate rebound on bargain-hunting and short-covering. And, of course, many use 5 percent trailing stops, which create the volatility effect even faster.

Again, there are a lot of reasons why stocks go up or down in the near term, and almost none of them have anything to do with dividend safety and dividend growth–which ultimately determine the value of any income stock. It’s never easy to ignore volatility. In fact, you shouldn’t. But unless that price volatility has something to do with your income stream, it’s never worth acting on.

Remember: We’re in this to build wealth by building positions in high-yielding stocks backed by healthy, growing companies–not to speculate on a few points of movement that will be forgotten in the wink of an eye.