This Month's Mini Panic Can Push Stocks Much Higher By Sean Michael Cummings, analyst, True Wealth
A new financial conspiracy theory has captured the attention of the U.S. stock market... On August 5, global markets fell in unison in a huge surge of volatility. Japanese stocks plunged double digits as the Bank of Japan embarked on a rate-cutting cycle. And all three major U.S. indexes ended the day down 3%. Then, when folks logged into their brokerage accounts to sell... they found a massive service outage instead. Charles Schwab, Fidelity, TD Ameritrade, Vanguard, E-Trade, and Robinhood all blinked out for three hours. The platforms in question chalked the error up to a technical glitch. But that's where things get cloudy... Conspiracy theorists are saying brokers planned the outage to prevent retail investors from piling on and making the crash worse. I'm not here to debate the validity of this theory. As I recently told you, staying invested was the smarter move in the long run. And now that some of the dust has settled, that message is even clearer. You see, the panicked mood from the start of the month has likely run its course. And according to history, that's great news for investors going forward...
| Recommended Links: |  Man Who Called 18% Market Surge Has Surprising New Prediction... On January 9, he told his readers, "I'm as 'bullish' as ever on stocks in 2024"... and he predicted that the S&P 500 would rise 13% to 18%. And in the first half of the year, it did exactly that. Then, stocks were hit by a wave of volatility. With investor anxiety running high, he sat down on camera to explain his new outlook on the market. Fair warning: What he sees coming in the next few weeks may trouble you. Full story here. | |
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When stocks fell, we saw a big spike in one key index – the CBOE Volatility Index ("VIX"). The VIX shows traders' near-term expectations for how options prices in the S&P 500 Index will move. The higher the index trends, the more volatility traders expect. In other words, the VIX gives us a sense of how much fear is in the broad market. And on August 5, the VIX soared to its highest level since 2020. Take a look... 
The VIX catapulted to a multiyear high at the beginning of the month. Market fear was absolutely through the roof. But today, it's as though that spike never happened. Check it out... 
This type of reversal is known as a "VIX crush" – when a huge spike in the VIX collapses about as quickly as it appeared. It's rare to see a VIX crush this severe. I wanted to find out what similar moves meant for investors in the past. So I tested similar moves in the VIX against stock returns going back to 1990. Now, the VIX fell 28% on August 6... which was one of the biggest VIX crushes in 24 years. We've only seen one occasion where the VIX fell further in a single day – May 10, 2010. (At the time, markets were calming down about a European debt crisis and fears that Greece might default on its financial obligations.) So to test VIX crushes more robustly, I had to lower my threshold. I identified any time the VIX fell 25% or more in a single day. Even with this allowance, I wound up with a sample size of only five. But all of the other cases pointed to outperformance over the next year... 
All four of the previous VIX crushes forecast big gains for stocks. Stocks have returned 8% a year on average since 1990. But you could have done a lot better if you bought on the day of a VIX crush... Historically, these opportunities have returned an average of 17% in a year – more than double the return of a typical buy-and-hold strategy. Whatever happened at the brokerages on August 5 is still causing speculation.But we know one thing for sure: Stocks have soared an incredible 58% since the last bear market bottom in October 2022... In other words, stocks are still in a long-term uptrend, even if they took a breather this month. And based on the VIX-crush data, even bigger gains should be on the way. Good investing, Sean Michael Cummings Further Reading Fear is back in the market. But that doesn't mean it's time to throw in the towel and sell. According to history, this scared market environment could be a buying opportunity in disguise... Learn more here. Recession headlines are running rampant. But the economic data isn't a monolith. When you look at the bigger picture, several key factors show us the overall health of the economy is strong. And that's a reason to stay invested today... Read more here. |
Market Notes HIGHS AND LOWS NEW HIGHS OF NOTE LAST WEEK Erie Indemnity (ERIE)... insurance
Novartis (NVS)... pharmaceuticals
Regeneron Pharmaceuticals (REGN)... biotechnology
Intuitive Surgical (ISRG)... medical technology
Fortinet (FTNT)... cybersecurity
Palantir Technologies (PLTR)... data and software
Fiserv (FI)... digital payments
Sea Limited (SE)... Singaporean tech giant
MercadoLibre (MELI)... "Latin America's Amazon"
GoDaddy (GDDY)... website hosting
Carvana (CVNA)... online used cars
Sweetgreen (SG)... fast-casual dining
Cava (CAVA)... restaurants
Hanesbrands (HBI)... apparel
Seabridge Gold (SA)... gold
Barrick Gold (GOLD)... gold
Alamos Gold (AGI)... gold
Agnico Eagle Mines (AEM)... gold
Targa Resources (TRGP)... natural gas
Fortis (FTS)... utilities NEW LOWS OF NOTE LAST WEEK Not many... It's a bull market, you know!
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