One Big Hurrah Before a Late-Summer Smackdown

By Michael Salvatore

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We’re smack in the middle of a historical profit bonanza… Here’s the best stocks to own… But watch for a volatile end to the summer rally… Why a short-term strategy is ideal for right now… Trade Cycles readers couldn’t agree more… And the AI trade is not invulnerable…

We’re right in the middle of what’s historically one of the best times to own stocks all year.

Yes, you read that right. Two months out from “Sell in May” and four months until “buy in November” is the best time to own stocks.

The summer doldrums may rightly earn their reputation for being a low-gain stretch. TradeSmith CEO Keith Kaplan proved it recently.

But hidden within these market lull seasons are strong bursts of strength – just like this week’s. Blink and you’ll miss them.

Here’s what I mean. Using the TradeSmith Seasonality tool, let’s take a look at the S&P 500 Index. Based on the last 74 years of data, from July 1 through July 16 stocks have returned close to 1% on average, with gains more than 70% of the time.

Annualized, that’s a return of more than 23%:

Said another way, the pace of returns for just the 16-day stretch we’re in right now has been more than twice as strong as the stock market’s long-term average annual return. And this data goes back to 1950.

Put yet another way, the best time to be long stocks was July 1. The second best time is right now. And the time to sell, historically speaking, is next Tuesday.

But which stocks to buy?

❖ History tells us the answer yet again…

One of my favorite ways to view data is to look at individual, historical stock performance for a given period.

It quickly helps you weed out the best stocks to own from a historical lens.

For the list of names below, I went back through 20 years of data to see which S&P 500 stocks had the highest average return for the period starting today, July 10 through next Tuesday, July 16, and the best track record of gains at that time.

I did a little filtering to eliminate names with a large average return but a poor win rate (under 70%)… stocks where one big win skewed the data… and stocks that haven’t traded for the last 20 years. (The more data, the better the signal.)

Turns out, there’s a lot to love about the next five trading days. At the top of the list is $34 billion utilities company Exelon (EXC), with an average return of over 1.4% gained three-quarters of the time across the last two decades.

For a slightly higher win rate, you could take a look at CMS Energy Corp (CMS), which has put up a respectable 0.7% average return from July 10 through July 16 over the last 20 years, with that average gain coming in two-thirds of the time.

If these gains sound small to you, think about the timeframe again. These are the average returns over just the next six days. Annualized, even 0.7% trades turn into nearly 53%.

Trading the short term with ideas like this helps you stay well ahead of the market and reduce your risk all at once.

In any case, we’ll be sure to check in on these picks next week and let you know how they did…

❖ But there’s volatility on the horizon…

The short-term bodes well for the stock market. But past that point, we’re staring down the barrel of a 12-gauge shotgun loaded with volatility.

Take a look at this seasonality chart of the CBOE Volatility Index (VIX):

More than 82% of time over the past 34 years – across all the VIX data we have in our system – the VIX has spent the two-month period between the end of July and the start of October climbing 22.83% on average.

To be clear, that’s generally bad. The VIX uses put option premiums to measure investor’s expectations for volatility in the S&P 500 over the next 30 days. When it rises, it’s almost always because stocks are falling, investors are scared they’re going to fall more, so they’re buying put options to prepare for it.

Now, theoretically speaking, the VIX can rise even as stocks go up. But that’s usually an extremely short-lived phenomenon.

More than anything, we should take this seasonality chart as a warning sign. There’s a very real chance that things could get bumpy as we head closer to peak election season, especially as more and more economic numbers paint the picture of a slowing US economy.

That’s the bad news. Ready for the really good news?

❖ Times of volatility are not times of despair…

For smart traders, they’re times of action.

As volatility rises, a very special thing happens in the market. The price that folks are willing to pay for call and put options rises. That means the profit potential in the options market rises exponentially in times of volatility.

Think about it. If stocks start to fall, the value of being able to sell them at higher prices with put options is going to go up, very quickly.

Even the ability to buy stocks lower than where they’re trading, using call options, would reasonably catch a bid in any downturn with an uncertain end.

This effect helps you as a seller just as much as it does a buyer. When you’re selling calls, as Keith showed you Friday, you should want prices to fall and for option premiums to be high. And if you’re selling puts on high-quality companies with limited downside, the boost in volatility gives you a great edge in your trading.

That’s the big takeaway here. When volatility strikes, you want to shorten your trading timeframe and start looking for quick-hit opportunities.

We love finding idea like this at TradeSmith. So much so, that we’ve dedicated a big chunk of our business to the seasonality indicators I’ve showed you… along with something else that’s incredibly powerful – helmed by a trader with a knack for scoring quick short-term wins in the places few people are looking.

❖ I’m talking about Trade Cycles analyst William McCanless…

William’s subscribers have been on an enviable tear lately.

On Monday, William recommended several trades, including these three big winners:

  • Afterjust one week, William recommended closing out a 68.6% gain on UPRO calls… betting on seasonal strength in the S&P 500
  • Trade Cycles also took a 74.7% gain on UNG puts, in a great directional play on natural gas
  • Finally, they closed out ODFL calls for a 44.5% win, banking on both a seasonal move higher and a Valley ending on the Trade Cycles patterns algorithm

These short-term options trades are exactly the kind of thing I was just talking about…

Each of these trades utilizes seasonal strength (and weakness) to capture large, quick profits that outpace even the top brass megatech stocks that get all the love from the mainstream financial media.

And even if volatility does strike, William’s subscribers are primed to make out like bandits.

That’s because, while William does regularly send them recommendations, they also have unlimited access to the seasonality tools I showed you earlier… and the Trade Cycles pattern software which shows where each individual stock is in its short-, medium-, and long-term cycles.

For an example of that, check out this chart of NVDA with both its composite cycle and its Peaks and Valleys indicators:

NVDA is entering a blue Valley zone, where its stock price historically falls, then climbs up though the next orange Peak zone. That means you could either trade it briefly to the downside – or buy the dip.

William uses these factors, along with Seasonality and many more, to confirm whether the broad trend is for or against a trade before he recommends it. That line of thinking recently led to the Harmonic Convergence indicator, which measures stocks on three proven factors to find quick-hit trade opportunities.

I’d encourage you to learn more about Trade Cycles right here if you want to be best prepared for a stretch of post-summer volatility…

And speaking of volatility, we have to talk about AI stocks

Now, look, I’m well aware that AI stocks have been some of the best performers all year long. I hope you’ve made great money trading them.

But to be blunt, trees don’t grow straight to the sky. AI stocks don’t only go up. And in all likelihood, if we’re about to stumble into a downturn, the biggest winners this year will have the biggest targets on their back.

What should you do?

Well… as I’ve argued here today… the answer is not to abandon ship while dumping your stock at any price, or even to worry about a downturn at all.

It’s to shift your thinking toward the short term. Start finding the best times to trade these AI stocks to maximize your profit potential.

A good friend of ours, Tom Gentile, revealed his strategy to do just that in a free research presentation he debuted on July 9.

He proved that by trading certain AI companies at predefined, opportune times lasting no longer than 30 days, you can potentially do much better than any buy-and-hold strategy.

Even better, these ideas are all laid out in his Money Calendar – a unique view of the markets that lays out the top stocks to trade every single day… along with how long to hold them.

Tom uses these calendar entries as his guiding light. And the results speak for themselves.

In early 2019, when hardly anyone was talking about AI, Tom picked some of the top AI stocks before the crowd took notice.

Any of his readers trading those picks with $10,000 would have turned that into almost $35,000 with Facebook (before it was renamed to Meta)…$42,600 with Microsoft… and more than $325,000 with Nvidia.

This AI boom has been great for anyone who listened to forward thinkers like Tom.

But now he believes we’re entering the Final Phase of the AI boom

And from here out, anyone who simply buys and holds AI stocks could actually lose a lot of money.

Instead, Tom has a list of 10 AI stocks for short-term trades during this last phase of the boom. Watch the replay of his free Final Phase presentation to get that list.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith