Warren Buffett said, “Be greedy when others are afraid.” With fear at its peak, now is an opportune time to be a little greedy.
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Just over a month ago, I wrote about how the big drop in implied volatility (IV) in NASADQ 100 (QQQ) stocks short term sell signal. This turned out to be the case as the QQQ has fallen by almost 20% during that period.
In a similar way, however, large spikes in IV also signal short-term buying opportunities. Currently, QQQ has reached the point that promotes a probabilistic rally in the next few months. Let’s take a look at some of the reasons why a higher step is on the way.
Seasonality
September was by far the worst month for stocks in the past decade, especially for higher-growth NASDAQ names. As September draws to a close, the coming months show solid seasonal returns. October and November are the second and third best months of the year for stock performance over the past 10 years.
Implied volatility
Implied volatility (IV) has again risen to recent extremes. A look at a reading of the VXN – or 30-day IV in QQQ options – shows that levels are back near the 40 area after hitting lows near 25 in August. You can see how highs in VXN over the past year have equated to short-term lows in QQQ.
Fear
The CNN Fear and Greed Index is back near the year’s lowest of 15, which is extreme fear.
The only previous time it was lower in the past year was in May. This coincided with a significant low in inventories.
AAII Investor Sentiment Survey is also at an extremely bearish level. The current bearish sentiment is over 60%, which is double the historical average of about 30%. This is considered a counter-signal that usually amounts to an outperformance of major stocks over the next 6 months.
The combination of seasonality, implied volatility and fear all increase the chances of a year-end rally in equities. Of course, probability does not mean certainty. As I always say, trading is about probabilities, not certainty. But traders who like to play the odds may want to take a guarded bullish position to take advantage of a likely pop in stocks through the end of the year.
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All the best!
Tim Biggam
Editor, POWR Options Newsletter
QQQ shares closed at $267.26 on Friday, down $-4.61 (-1.70%). Year-to-date, the QQQ is down -32.49%, compared to a -23.93% rise in the benchmark S&P 500 index over the same period.
About the author: Tim Biggam
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as Market Maker for First Options in Chicago. He appears regularly on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live”. His overriding passion is to make the complex world of options more understandable and therefore more useful to the everyday trader. Tim is the editor of the POWR options newsletter. Read more about Tim’s background, along with links to his most recent articles.
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