The Best Stocks to Trade on a VIX Collapse
|
Listen to this post
|
In this digest:
- The VIX crush and what it means for the next few months…
- How one trading expert predicted the “rip your face off” tech rally…
- What’s next for TradeSmith’s top swing-trading strategy…
- The next major tech leap could change our world…
- How Eric Fry is finding the big winners and losers today…
The CBOE Volatility Index (VIX) just got “crushed”…
From the third-sharpest rise of all time, the VIX has completely retraced in just two weeks. Take a look:
In the nine days since the peak of volatility on Aug. 5, the VIX has collapsed 57%.
But while VIX surges to that degree are extremely rare – a rise of 100% or more over three trading days has only happened twice in the last 20 years – VIX collapses are much more common. In that same timespan, the VIX has fallen 50% or more over the course of seven trading days 1,729 times. That’s an average of 86 times a year.
It’s also, historically, a short-term buy signal – though a mild one.
Buying the S&P 500 ETF (SPY) and holding it for 21 trading days from these VIX collapses results in an average gain of 0.8% and a win rate of over 65%.
Double the hold time on this signal to 42 trading days (or two calendar months), and your average return rises to 1.7% and a 72.5% win rate.
Three months out, you’re looking at a 71.6% win rate and an average gain of 2.4%.
You might be noticing that these gains, while positive and largely dependable, are a bit muted. Buying on big VIX declines is not all that different from the long-term average performance of the S&P 500, about 9 to 10%.
To us, this reinforces the idea that for investors primarily buying index funds, you want to treat dips as long-term buying opportunities and not really a vehicle to trade.
Though, it is noteworthy that the win rate rises over a two-month period, and that could make for a good swing strategy using call options.
If you’re looking to trade individual stocks, however, you can do a lot better…
Let’s take a deeper look at what a VIX crush can do…
Only under truly rare conditions can you expect outsized gains from trading the SPY over a one- to three-month period. But using the same parameters, we can dive into the S&P 500 and find the best stocks to trade when we’re faced with a signal like we’re seeing today.
When the VIX collapses by 50% or more over the course of seven trading days, a few stocks jump to the top of the pack when it comes to win rate. With hundreds of trade signals to study, we should take these as very strong contenders:
| Symbol | Trades | Avg. Trade | Win Rate | Avg. Win |
|---|---|---|---|---|
| CDW | 254 | 1.15% | 61.00% | 4.15% |
| MNST | 471 | 1.64% | 60.50% | 6.02% |
| AVGO | 1.58% | 1.58% | 60.30% | 5.33% |
| MA | 416 | 1.17% | 60.30% | 4.44% |
| IT | 471 | 1.01% | 60.30% | 4.55% |
With this much data, you start splitting hairs on win rate. So for me, the real winners here are Monster Energy (MNST) and Broadcom (AVGO) – each posting win rates of around 60% and gains of 1.6% and 1.5%, respectively. The average winning trade on each of these is also very high, at 6% and 5.3%.
A great swing trade might be to buy a call option on one or both of these names dated out to mid-September.
Statistical evidence is a great swing-trading tool…
Ask our very own William McCanless, editor of Trade Cycles and master of seasonality and conditional data, for the proof.
The morning I’m writing this, he sent out an alert to close a quick swing trade on the ProShares UltraPro S&P 500 ETF (UPRO). William timed the move perfectly, having recommended call options on UPRO just six days ago, near the peak of volatility.
That option trade returned about 50%, while UPRO itself returned close to 12% in that short time.
Going back further, William issued a big recommendation around mid-July to clear out a chunk of market exposure in preparation for the drop he saw coming. As he said at the time:
The price action of nearly the entire decade of the 1990s is correlated with the current market’s price movements by 60% or more. Here’s how it breaks down:
- 1994 – over 60% correlated
- 1990 and 1995 – over 70% correlated
- 1992 and 1993 – over 80% correlated
And here’s where it gets interesting…
- 1996 – 93% correlated
- 1997 – 93% correlated
- 1998 – 93% correlated
- 1999 – 92% correlated
The only other decade that has as many years correlated with the current year’s price action is the 1950s, but the 1990s have the highest percentage correlations.
In fact, I have never seen a string of four back-to-back years that were so strongly correlated to a single year’s price movements.
So, I went to look at the average price action on the indexes of those years.
Here’s the reading for the SPDR S&P 500 ETF (SPY) for the year 1990 and the years 1992 through 1999:
Beginning effectively today – Wednesday, July 17 – there is a seasonal drop into Aug. 30. On average, SPY has fallen during the period, for an average negative return of 3.6% at a 67% accuracy rate.
The Nasdaq 100 chart looks about the same:
Between July 17 and Aug. 30, the Nasdaq 100 fell for an average negative return of 3.95% during those ‘90s years – again at a 67% accuracy rate.
And right now, both SPY and the Nasdaq 100 are entering Peaks according to our Trade Cycles algorithm, with the next Valleys beginning in the middle of August… which lines up incredibly well with the seasonality readings.
By now, you’ve probably heard how everyone is comparing the current markets to the Internet boom of the 1990s. Well, maybe they’re right.
But as you can see, even in that booming dot-com market – before the infamous bust happened – July through the end of August was not favorable for the markets at all.
You can see how William puts the power of data to great use here. He’s looking through history to find markets that look like this one, and using that evidence to find great opportunities.
Even a couple weeks early, taking a cautious stance in mid-July was the right call. As was playing the bounce higher.
If you’d like to learn more about William’s approach, especially as we continue through a historically volatile period for stocks (aka, a great time to trade big moves), check out his recent research presentation here.
Look out for tomorrow’s TradeSmith Daily, where I’ll share a recent interview with William and we’ll talk in depth about the UPRO trade.
Another perspective on the market rebound…
There’s more than one way to skin a cat – or trade a market. The analysts that stick to the method that works best for them tend to catch our ear.
Even if opinions don’t line up, it’s useful to look at varying perspectives on the market’s direction. Often, it can expose areas you’ve missed…
I recently tuned in to one of the daily trading livestreams from Jonathan Rose, founder of Masters in Trading. Jonathan’s taken a decidedly bullish stance in the wake of the recent bounce. Here’s a quick excerpt from his blog explaining why:
Let’s take a moment to reflect on the QQQ’s recent performance. In March 2023, the QQQ was trading near its 200-day moving average, a critical support level that set the stage for a remarkable rally. By July, it had soared to 387 — a staggering return of approximately 35.8%. Then, on Oct. 26, 2023, the QQQ was at 342.35, only to climb again to 448.64 by March 8, 2024, marking another impressive gain of around 31%.
These movements are not just numbers; they represent the potential for significant profits. But the real question is: will we see this kind of explosive behavior again?
With the QQQ recently touching its 200-day moving average once more, the stage is set for what we refer to as a “RIP YOUR FACE OFF RALLY.”
The moving averages Jonathan cites above are another form of long-term statistical data. As markets move, the average price level over various time periods acts as support or resistance. Right now, we’re bouncing hard off the 200-day moving average and bumping against the 100-day moving average that previously acted as resistance back during the April correction.
In Jonathan’s view, if we break this resistance, we could see a swift surge back toward all-time highs.
[Update: as I write Thursday morning, we seem to be getting that rally. QQQ is well above the 100-day moving average, and Jonathan declared to his community that “the QQQ face has now been fully ‘Ripped Off’.”]
Jonathan explains more in his full blog post and accompanying video you can view for free here.
Also, go here to sign up for Jonathan’s daily livestreams for a unique perspective on trading – one that deals heavily in order flow and precise technical levels.
Switching gears, let’s talk tech…
It’s been a long time since we’ve seen a truly game-changing technical innovation. The last one, we’d argue, was the internet.
But what we have to understand is that major technological leaps aren’t entirely positive. The internet has done plenty good and plenty bad for society. But one thing we can’t deny is how much wealth it’s created. One needs only look at the market cap of Google, Amazon, Meta, and other big tech companies for the proof.
The next innovation could create multitudes more… but it won’t come without its drawbacks. And this time, it could even prove an existential threat to our current way of life.
I’m talking about Artificial General Intelligence, or AGI. This refers to the point when AI systems surpass the intelligence of the smartest humans on earth. Not only that, but this is when these systems will be able to teach themselves, unlocking exponential abilities.
Now, most assume AGI won’t be here anytime soon. It sounds far too sci-fi.
But major technologists and futurists are preparing for the opposite – for a world with AGI well before the 2040s.
Elon Musk, for example, thinks we’ll see AGI in the next 24 months. And he thinks the first step toward it, where AI surpasses human intelligence, will happen in half the time.
But here’s the truly crazy thing…
Wall Street is completely asleep at the wheel on the implications of this.
Remember, tech breakthroughs come with good and bad. That’s just as much the case in the investment world. For every company that accrues billions and trillions thanks to new tech, many more go completely bust.
This development is so important to understand, difficult as it might be to fully grasp.
That’s why, when I have questions about things of this nature, I turn to Eric Fry from InvestorPlace.
Eric has made a name for himself in seeing big trends early on. He’s recommended over 40 companies that have gone on to return 1,000% gains.
He’s been studying the AI trend very closely. He believes there is a much smarter and far less risky strategy for building wealth in the age of AI’s exponential progress – and many of those investments are in companies that have no visible ties to AI whatsoever.
And he’s set to recommend a number of stocks to buy, and avoid, as the AGI trend accelerates.
I’d recommend signing up for his upcoming webinar to learn more. There you’ll learn the name and ticker symbol of an AI stock serving an important niche in global travel business.
During that event, you’ll learn how to join Eric’s premium investment letter The Speculator, where he regularly researches stocks he believes are 10x opportunities. New subscribers will also get a list of five AI stocks to buy, five more that could completely go bust in an AGI world, and one recommendation for a stock that’s one of the least-understood AI plays in the market but that could prove to be the most important.
Go here to sign up for free.
To your health and wealth,
Michael Salvatore
Editor, TradeSmith