I hate to be a downer. Life’s too short for that.
But I’m apparently in them minority.
According to a Pew Research Center survey late last year, 66% of Americans think the U.S. economy will be weaker 25 years from now.
More than three-quarters think the country will be even more politically divided than it is now.
I guess it’s no surprise with endless headlines about war, recession, inflation, election chaos, hurricanes, and more.
And, as we saw this week, the stock market.
I know the media thrives on negativity, but fact are facts: Monday’s massive sell-off was the worst day for stocks in two years.
I certainly felt it, and I’m sure you did, too.
But there’s a difference between negativity and volatility.
Negativity implies bad circumstances. In the big picture and over the long term, that’s not the case for stocks.
Volatility implies accelerated motion for stocks. It can feel bad, but it doesn’t mean things are bad.
Understanding that difference is important. It might help you feel a little more optimistic, and it should help you avoid potentially serious mistakes…
Volatility Showed Up On Time and in a Big Way
It was a crazy week, no doubt about it.
That’s not me just saying that. The data proves it.
The CBOE Volatility Index (VIX), referred to as “the VIX” because of its symbol, is the most widely used measure of market mayhem. It surged Monday to the highest level since 2020.
That huge spike to the left is the March 2020 sell-off when everything shut down because of the pandemic. Monday didn’t come anywhere close to that, but the highest reading in four years is still significant.
The S&P 500 fell more than 3% Monday, which it hadn’t done since September of 2022. To make it sound even scarier, the Dow Jones Industrial Average lost more than 1,000 points. The Dow’s days as a legitimate market proxy are long gone, but let’s face it, a thousand point drop sounds bad.
Unfortunately, I expect more craziness in the coming weeks, so it’s best to be prepared.
You can read all the headlines trying to figure out why stocks got volatile, but the reason will change pretty much every day. If we look at the data, we see something less frightening – this is what stocks do. August and September are historically volatile, and August announced its arrival in a big way.
The upcoming election adds combustibility to the volatility. Wall Street absolutely hates uncertainty, and big investors historically lighten up a few months before the election. The polls have narrowed between Kamala Harris and Donald Trump, so uncertainty has increased.
But just as Big Money reliably moves out of stocks prior to the election, it also reliably floods back in just before Election Day or right after when the result is clear. And it doesn’t matter whether the winner is a Republican or Democrat. Certain sectors and stocks may do better depending on the winner, but the overall trend consistently points to a stronger market.
Knowing this, this week’s chop wasn’t surprising. The headlines change each year – and each election year –but to borrow a movie title from my one of my favorite bands, Led Zeppelin, “The Song Remains the Same.”
This year’s verses include things like renewed recession fears, which the data doesn’t yet support. There’s also the “will they, won’t they, and when” questions about the Federal Reserve cutting interest rates. And we’re in earnings season, which frequently produces investor overreactions and therefore irrational and outsized moves in stocks.
But it’s not all bad.
Volatility Can Be… Bullish?
Yes, bullish.
That may sound a little crazy, but it’s true. My colleague Luke Downey ran another one of his killer signal studies going back to 1990 to see what stocks after the VIX closed at 40 or above. (It closed at 38.57 Monday’s.)
Check out those returns – almost 50% in the S&P 500 and 85.8% for the Nasdaq 100 two years later.
That’s definitely not a downer. I’d call it outright optimistic.
And it doesn’t end there. Luke dug deep and found something else quite bullish: Since 1990, the VIX has closed up (volatility increased) 15 points or more in a day just six times. It added 15.2 points on Monday. The S&P 500 was up two years later every single time, with the average gain of 52.3%.
We went over this study and some other fascinating charts in this week’s Power Trends+. If you missed it, make sure to check it out here.
My message to you today is that we have many more reasons to be positive in this bumpy market – whether it lasts two weeks or two months – than reasons to be pessimistic.
And I’m not saying that just to make us feel good. It should inform your investing strategy.
Your Volatile Markets Playbook
It’s important to have a plan for when these stormy months roll around, and here are the two key points.
First, don’t let fear take over. If you’re already invested in high-quality stocks, you may not want to sell during these lows.
These are the stocks I designed my Quantum Edge system to identify. When you invest in companies with superior fundamentals and Big Money inflows, there’s a high probability that Big Money will resume pouring into these stocks.
Money flows can change on a dime, too. The pros that manage massive amounts of money might shift their thinking, or algorithms that increasingly dominate Wall Street trading might flip.
You may be surprised – and angry – to learn that those algorithms often help drive down the prices of stocks to flush out “weak hands” or trigger stop-loss alerts… with the intention of buying those very same stocks at lower prices.
It’s gamesmanship, but it’s legal. And it’s a trap you want to avoid.
That’s why selling great stocks into volatility not only means you probably lose more than you should have, but that you also probably miss the rebound to higher highs.
Second, take advantage of other investors’ selling to buy great stocks at discounted prices. Might as well join Big Money’s game, right?
Just be sure to focus on those same stocks that the data shows have the highest probability of making you money – those with strong fundamentals and technicals combined with Big Money inflows.
I know it can take intestinal fortitude to buy stocks during times of turmoil, but that’s exactly why I took the taken emotions out of investing with my Quantum Edge system. Emotions lead to poor decisions, and Wall Street knows how to prey on them.
Stay focused on the data – about the market and individual stocks. We’ll keep talking about both here in Power Trends. Doing so helps quite the noise and calm the chaos.
And you just might find yourself feeling a little more optimistic – and making more money – than almost everyone else.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
