Yesterday, I heard some market experts, who shall remain nameless, talking about how the CBOE Market Volatility Index - commonly known as the VIX, or "fear gauge" - dipping below the 15 level was bearish for the market.
"Big" statements like that are easy to throw out there, and they usually draw some notice.
But... is this statement really true? Something about this was bothering me - it was a little "too easy" - so I turned to my charts.
What I found, and what I'm about to show you, was surprising. Very surprising.
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Turns Out, Conventional Wisdom Is Wrong
The chart below shows the 30-day (one month) moving average of the VIX going back to the beginning of 2016.
The moving average dipped below the "critical" 15 level on Dec. 6, 2016, and stayed below that level for more than a year. In fact, it wasn't until Feb. 6 of this year that the moving average climbed above 15. Who could forget that day?
Now, if the market pundits were correct that a VIX below 15 is bearish, that would mean stocks had a rough time during those 14 months. Is that what happened?
Well, if you look at all the stocks in the Nasdaq 100, the answer is an absolute, definite "NO!"
In fact, these stocks would be hard-pressed to put in a better performance.
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The bottom line is that these stocks averaged an astounding 37% return during that period. Even more impressive is the fact that just 11 had a negative return.
I repeat: Just 11 stocks went down.
The top 20 performers nearly doubled in price, averaging a 98% return. This group included the obvious - Netflix Inc. (Nasdaq: NFLX) at 113%, Amazon.com Inc. (Nasdaq: AMZN) at 89%, and Tesla Inc. (Nasdaq: TSLA) at 80%.
But, more exciting and interesting to me were the under-the-radar names, including Take-Two Interactive Software Inc. (Nasdaq: TTWO) with a whopping 146% increase, PayPal Holdings Inc. (Nasdaq: PYPL) at 94%, and even Marriott International Inc. (Nasdaq: MAR) at 71%.
The takeaway message is that volatility is in the eye of the beholder. Just because the VIX drops below 15, it doesn't mean it's time to load up on puts. There's plenty of room for the VIX to move lower.
Trading based on an arbitrary number like 15 is foolhardy.
With the VIX, context is everything. 2017 proved that, as only a handful of daily readings topped 15 during the entire year.
Yet the major indexes enjoyed healthy gains.
I think it's silly to proclaim the market is bearish just on a single indicator. That's why I have a more bullish outlook for stocks in the near to intermediate term.
A look at the charts of the major market averages shows their 50-day moving averages pointing higher, with the Dow Jones Industrials being the only exception. The "wall of worry" that markets tend to climb appears intact, with pundits fretting over trade wars and higher oil prices.
Don't let the VIX pulling back put you in a bearish frame of mind. Nasdaq stocks did just fine the last time it happened, and I think they'll do fine once again.
To capture that "fine" performance for yourself, I recommend buying the QQQ September 21, 2018 $170 call (QQQ180921C00170000) on the PowerShares QQQ Trust (Nasdaq: QQQ), the proxy ETF for the Nasdaq 100.
On Thursday, I'll be back with two Nasdaq stocks that my "Best in Breed" system has identified as standouts in an outperforming sector. Don't miss it. In the meantime, have a safe and enjoyable 4th. See you Thursday.
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.