By Lucas Downey, TradeSmith, Trades Of The Day, 2024-08-09
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I'll be straightforward today…
If you're not buying this dip, you're making a big mistake.
Over the last handful of days, pundits strived to convince you the financial world has turned upside down. Recession callers came out in full force. And traders hit the panic button.
Yields are plummeting.
Stocks are dropping.
Major currencies are gyrating.
It sure looks like “the big one” to a casual observer.
Do yourself a favor and don't fall for it. What's really taking shape right now is an incredible buying opportunity.
That's because what we're seeing is a rare episode of “forced selling.” And when these happen, we should welcome them with open arms.
You see, the biggest news of the week isn't about recessions or the odds of a Federal Reserve rate cut. It's the violent surge in the popular Wall Street fear gauge, the CBOE Volatility Index (VIX).
Earlier this week, I touched on how the VIX eclipsed 29 on Friday. I showed you how, when volatility comes to town, owning high-quality dividend growth stocks will insulate the blow.
But as we'll see today, Monday's crash sent the VIX to rare highs. That's spawned two bear-killer signals… which suggest you get out your buy list.
History says a wave of buy pressure is coming… and soon. Read on…
Stocks Approach Correction Territory
Remember when we were in a never-ending bull market a couple of weeks ago?
It's easy to forget… but I promise you, it happened!
In incredible fashion, the S&P 500 has since slid nearly 10%. From July 16 to the Aug. 5 low, the S&P fell from 5,667 to 5,119, a nearly 550-point drop.
Below, you'll see the carnage in yellow:
Even more eye-popping is what's taken hold in the volatility markets. The VIX at one point on Monday morning hit 65!
After all the dust settled, the VIX closed at 38.57, a height not seen since March 2023. Back then, we were dealing with the regional banking crisis.
This week, we're seeing the havoc that a collapsing carry trade has on asset prices. (For more on the “yen carry” trade, read yesterday's dispatch from Michael Salvatore.)
That sent traders scrambling for options, thus bidding the VIX up 15 points in a single session:
As alarming as a surging VIX appears on the surface, it's really a blessing in disguise. Because when uncertainty screams higher, and stocks are flushed down the toilet, bottoms begin to form.
Even after a fire burns down a forest, eventually sproutlings of vegetation form… And the circle of life begins anew.
Similarly, this phenomenon translates into stocks.
So here's why you need to be greedy during the current equity bonfire.
Since 1990, the VIX has closed at 38.50 or higher 239 times. Here's the average of what happened next…
- 6 months later, the S&P rips 15.8%, and the NASDAQ 100 surges 30.5%
- 12 months later, the S&P jolts 31.3%, and the NASDAQ 100 catapults 53.7%
- 24 months later, the S&P screams 47.5%, and the tech-heavy NASDAQ explodes 86.1%
This should be printed out and stuck on your refrigerator…
VIX levels approaching 40 bring some of the best deals you're gonna get.
But before we end this bear-killer piece today, I want to take Monday's episode a step further…
Because it was, in fact, one of the steepest rips for the VIX ever.
A 15-point Daily Surge in the VIX Is Rarer Than Rare
Back to 1990, only five prior occasions saw a daily climb of 15 points or more:
- One occurred in 2008
- A couple fired off during the March 2020 COVID crash
And since 1990, whenever the VIX surges 15 points or more in a day, both the S&P 500 and NASDAQ 100 scream higher in the months to come.
Here's what the major indices do after this rare datapoint:
- 6 months later, the S&P 500 jumps 19.7%, and the NASDAQ 100 jumps 31.6%
- 12 months later, the S&P 500 surges 35.1%, and the NASDAQ 100 rips 49.6%
- Be bold for 24 months and you're staring at 52.3% gains for the S&P 500 and 69.6% for the NASDAQ 100
Folks, enough with the fear mongering. These evidence-rich studies point to monster gains ahead.
Yes, some unfortunate money managers are on the wrong end of a trade and being forced to sell… pushing stocks to attractive levels.
Volatility like this rarely comes along. So, act accordingly.
Start building a rockstar buy-list of companies with healthy sales and earnings growth. Stocks like that won't stay in the penalty box long.
As history proves, the bounce back will be swift and ferocious.
Don't get left without a shopping list… now's the time to strike.
I'll say it again, if you're not buying this dip… you're making a big mistake.
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily
Source: Trade Smith
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