Weekly Update: One of the Fastest Reversals Ever

[TradeSmith Investment Report logo] [TradeSmith Investment Report logo] August 15, 2024 [Homepage]( / [Portfolio]( / [Special Reports]( One of the Fastest Reversals Ever Volatility isn’t normally a sprint, but this year it took a page out of Noah Lyles’ gold medal-winning 100-yard dash. It lasted longer than his 9.79 second run… but not much longer. The “volatility index” – called the VIX because that’s its symbol – had one of its sharpest swings ever. It may be the fastest reversal I’ve ever seen. You can see it as well on the chart below. The VIX opened Manic Monday (Aug. 5) at 23.39, rocketed up 183% to 65 within five hours, and ended its trading day nearly 70% below that peak at 38.57. Just one week later, this past Monday, the VIX dipped back under 20. And with stocks bouncing today, volatility calmed even more and the VIX snoozed its way down to 15. Let me share a peak inside my Quantum Edge system because it shows us exactly what Big Money has been up to. This is the money that accounts for up to 90% daily volume and is now driven by algorithms. Source: MAPsignals.com You can see the huge red bar to the bottom right. That’s Aug. 5, and that red light represents the 374 Big Money sell signals my system identified that day. You can see the corresponding drop around that time in the SPDR S&P 500 ETF Trust (SPY), which is the blue shaded area. But then notice the yellow arrows. They show how those red bars quickly dried up and the corresponding bounce in SPY. Our stocks bounced even more, up over 8% on average since Aug. 5. Our biggest gainers are stocks that got hit in July volatility – the large tech stocks, including seminconductor stocks. That’s typical when you invest in the strongest stocks to begin with, and it’s why we don’t overreact to broad-market selling. In the 10 days since Aug. 5... - Monolithic Power Systems (MPWR) surged nearly 20% to fresh all-time highs today and is now up 83% in the portfolio. - KLA Corp. (KLAC) rallied 19% and is up almost 53% for us. - Applied Materials (AMAT) bounced 16.5% and is sitting on 57% gains for us. - ASML Holdings (ASML) jumped 13%. We added it in July before that round of selling, so we’re down 1.55%, but it remains a strong opportunity and a good buy at current prices. So is all of the expected August, September, and pre-election volatility behind us? I wouldn’t count on it. On the one hand, this quick bounce is consistent with rare VIX readings like on Aug. 5. My colleague Luke Downey ran one of his patented signal studies, researching what happens after the VIX closes at 40 or above. Sure enough, higher prices follow on average from one month to two years later. And check out those Nasaq 100 returns especially. That index holds the 100 largest stocks on the Nasdaq exchange, and it roared 85% higher on average over the next two years. Equally exciting, returns were positive in all 204 occasions two years later. That’s noteworthy not just because of the huge gains, but also because we have 10 Nasdaq 100 in our [TradeSmith Investment Report portfolio]( – including the semiconductor stocks mentioned above. But we can’t ignore data that forecasts more wild swings in August and September, the weakest months of the year. And this year, we add another established seasonal pattern in election years. Big Money tends to lighten up on stocks in the months ahead of the election before pouring back in once the results become clear. We kow to expect volatility, and we know everything points to a potentially huge run after it’s behind us. In fact, we got more bullish data this week on inflation, the biggest market bogeyman for a couple of years now. Consumer prices increased just 2.9% in July from last year – the smallest increase since March 2021 – and rose only 0.2% from June. Wholesale inflation was also nice and cool with the Producer Price Index up just 0.1% from June. This all but seals the deal for a much anticipated rate cut from the Federal Reserve. The question now isn’t when but how much? According to CME FedWatch data, investors assign a 0% probability that rates will stay the same at the upcoming September meeting. They anticipate a quarter-point cut (70.5% probability) or a half-point cut (29.5% probability). Big Money has been investing for lower rates for some time, and we’ve gone on a nice ride with it. With the first cut so widely anticipated, it might not light an immediate fire under stocks, but it does add a nice boost to what looks to be a juicy year-end rally. We’ll stay strong and focused through any volatility, and we’ll take advantage of lower prices to add more of the highest quality stocks in the market – those with superior fundamentals, strong technicals, and those all-important green lights from our algorithms that tell us Big Money is buying. Even through the bumpiness, we continue to make good money. More than 80% of the stocks currently in our [TradeSmith Investment Report portfolio]( are positive, with our 19 winning positions up 33.6% on average and our four losing positions down just 5.2% on average. We may bump around a bit in the coming weeks, but expect more and even bigger outperformance in the coming months. Earnings Season Winds Down We get important data for the market and our stocks during the four earnings reporting seasons each year. The latest one is largely complete, and the results are encouraging. With more than 90% of S&P 500 companies reporting, 78% beat earnings expectations while 59% topped revenue estimates. That’s pretty common, but this time around, S&P 500 earnings grew 10.8% – the most in nearly three years. Our companies have topped that. With 18 of 23 reporting, 89% beat earnings estimates and 67% beat sales forecasts. That’s because we invest in strong and growing businesses to begin with. We can now add one more to the list. Applied Materials (AMAT) just released results after the close and also topped expectations. AMAT earned $2.12 per share, up 12% from last year and ahead of estimates of $2.12. And sales hit $6.78 billion, ahead of estimates for $6.68 billion. The semiconductor equipment maker also upped forecasts for the current quarter to $2.18 per share (the midpoint of guidance) with the Street currently at $2.14. Sales are projected to rise to $6.93 billion, also ahead of estimates for $6.72 billion. CEO Gary Dickerson said the AI race is fueling demand for AMAT’s products, positioning the company to outperform over the long term. I don’t see any surprises in here – just continued growth. I’ll dig into the full report and management’s call and let you know if anything has changed, but I still like AMAT’s long-term potential. Talk soon, [Jason Bodner signature] [Jason Bodner signature] Jason Bodner Editor, TradeSmith Investment Report ©2024 TradeSmith, LLC. All Rights Reserved. P.O. 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