History Says Stocks Will Rally – Is It Different Now?

Whenever stocks sell off these days, you can usually be sure of two things. Bears (many of whom are long- standing) will say that this is just the tip of the iceberg, andbulls will say that you need to take advantage of the buying opportunity. Over the last few years, the bulls have been proven
correct. Indeed, since the early 1990s buying into the current setup has generally been quite profitable. However, there are afew reasons to believe that this time may in fact be different, at least when it comes to instant gratification for dip-buyers.
* Over the last few years, and particularly in 2017, it has paid off to fade equity weakness more or less immediately. Mean reversion in low volatility environments means that any spike in vol is a buying opportunity.
* Bloomberg analyst Thomas Cuppernull identified some simple criteria that fit the current environment very well. Specifically, a trailing one-month average VIX reading below 15 and a three-day move in which the level of the VIX rises by at least 40%. Since 1990 there have been 17 occasions on which these criteria have been met, with 11 of them coming since the start of 2014. (There are three instances in which the criteria have been met separately within a few days of each other.)
* On balance, the performance of the S&P 500 subsequent to such volatility spikes has been excellent. The average one-month return has been 1.3% with a median of 1.5%. There have only been two occasions in which the index has ended up lower after a month — a pretty stunning hit ratio. So should investors be
loading up the boat on stocks?
* “This time is different” is famously one of the most expensive phrases in finance, but perhaps this time really is different — at least in the short run. Short volatility strategies are more deeply embedded than has been the case in recent years. The last CFTC report showed that nominal speculative net shorts in VIXfutures were at an all-time high. While the short was not quite as extreme as a percentage of the open interest, even that ratio is higher than all but one of the prior vol spikes in our
* Moreover, the technical picture, particularly for technology stocks, remains negative. And the stock market drawdowns this year remain extraordinarily small by the standards of history.
The real “this time is different” bet is that stocks continue to rally more or less in a straight line.

Source: Bloomberg Pro Terminal

Trader – S. Fuchedzhiev

 Varchev Traders

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