Two weeks ago, I noted on this blog that we were buying volatility (VIX) ETF’s to play the potential for a renewed spike in volatility. This, after a period of retail investor complacency and a bearish smart/dumb money signal – noted here. After a couple of days of market downside this week, it appears that my call on a spike in the VIX was correct. The chart below is one I update regularly. Note the top pink horizontal line. That is one of my sell levels for the VIX. The VIX had moved off of my mid-point buy line (dashed gold horizontal line) and was hanging around the 27 mark when I bought the volatility ETF in our ValueTrend Aggressive Strategy. Today, the VIX moved above the top pink line. So I sold. We made solid a double digit return on the trade in 2 weeks. We may re-enter it later, but that’s another subject.
I mention the VIX trade only to illustrate the value of having an action plan. Note that we do NOT take on aggressive strategies like VIX ETF’s, inverse ETF’s, or high beta stock/commodity plays in our larger ValueTrend Equity Platform. As such, our conservative platform might have similar objectives that you may have in your own portfolio. Hopefully today’s blog, which highlights 3 strategies we are following in our conservative platform, will offer ideas on things you should be watching over the coming weeks.
Some things to watch for over the coming weeks
- Strong support lies between 3150 – 3200 on the SPX: I’ve blogged a few times about the divergence in momentum indicators – which gave us a heads up to the volatility we are seeing this week. Its my opinion that we will see more up/down chop ahead – probably with a bit more bias to the downside. At least until after the election. With this in mind, we raised about 30% cash a week ago, up from around 20% previously. So far, so good. Our view was, and still is, to redeploy that cash after the election. However, one key support level on the S&P 500 near 3200 would likely inspire deploying some of that cash prior to the election. If we see a confirmed test and bounce off of 3200, we will buy. If 3200 fails, a test of the 40 week (200 day) SMA near 3150 with no violation of that level will inspire us to buy some new positions. It is our opinion that, short of a black swan event, one of these two levels are highly likely to hold, no matter what the market noise is in the near-term.
2. Opportunity in the re-opening & value stocks: Yes, yes, I read the news too. COVID, the sequel, has arrived at a theatre near you. But its only a matter of time for retail, entertainment, travel and energy usage to pick up again after the inevitable production of faster testing procedures and a vaccination program. This will take time, but markets look forward by many months. Meanwhile, the stay-at-home stocks are ridiculously overvalued and technically overbought. You have to make a choice here. Do you hope for the hype to continue, or do you play the contrarian, but less hyped stocks when you go back into the markets (assuming you hold cash, like me)? The AMZN chart below displays the typical profile of many of these high flying stocks, which are showing signs of overbought momentum finally rounding over along with moneyflow momentum declines. Meanwhile, value stocks, as noted in this blog, are showing positive technical developments, along with compelling valuations. Market index plays are not likely the best place to be if we see a rotation into the reopening stocks. Indices like the SPX are vastly overweight the technology and “stay at home” stocks. If they take a back seat to value, the index investor will underperform.
3. Don’t be afraid to be a contrarian: Recall Sir John Templeton’s advice – “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude.” I’ve noted recently that oil is, in my opinion, the next great contrarian trade. I believe there will be more downside into year-end on this sector as tax loss selling adds to the despondency. Take a look at the chart below. Support for WTIC lies near $35. Oil will hopefully land there by year end. It is at or near that level that oil and the producers (which correlate to some degree in activity to the commodity) will hopefully find support. There will be opportunities on beaten down sectors like energy that will benefit from an eventual re-opening after the COVID Sequel. Keep an eye, and hold your discipline as these opportunities present themselves.