This Is the Absolute Best Time to Buy Stocks
Robert Ross|August 6, 2024
As someone who invests for a living, this is the type of price action I get excited about.
Everyone knows the market cycle is affected by the emotions and sentiment of investors.
There are countless market sentiment indicators, but the one I watch closest is the CBOE Volatility Index (VIX). Also known as the “fear index,” the VIX tells you how investors are feeling about the market at any given time.
When the VIX is below 20, it corresponds to stable periods in the market. And when the VIX is above 30, it means investors are nervous.
But when the VIX “spikes” to 50 or higher, it’s a full-blown market panic:
And we just had one of those VIX spikes, which should be your buy signal.
A Perfect Short-Term Storm
The market had been in one of the lowest volatility rallies on record until this week.
Prior to the last two weeks, the S&P 500 hadn’t had a 2% single day drop in over a year. That was the longest such streak since 2007.
In addition, the VIX had not gone above 20 the entire year.
But that all changed last week.
First, we had the unwind of the “carry trade.” The Japanese central bank surprised markets last week by raising interest rates for the first time since 2016. This unexpected move has led to a sudden appreciation of the yen, which is causing massive unwinding of carry trades, where investors had borrowed yen to invest in higher-yielding assets elsewhere.
Second, we’ve had disappointing earnings reports from some of the major tech players, particularly Amazon (AMZN), which saw a 10% drop after issuing disappointing guidance.
This has shaken investor confidence in the Magnificent 7 stocks that have been driving the market since the October 2022 lows.
[Editor’s Note: In the wake of yesterday’s craziness, Shah will be taking a closer look at the Mag 7 in a special edition of Buy This, Not That tomorrow. Stay tuned.]
Lastly, the U.S. jobs report came in weaker than expected, raising concerns about the strength of the economic recovery and the potential for slower growth ahead. This combination of factors is creating a perfect storm of market anxiety and sell-offs, causing a very rare VIX spike above 50.
In fact, the last time the VIX crossed 60 – as it did on Monday – was the COVID crash in March 2020.
But luckily for us, these types of spikes often mark the bottom of a market sell-off and presents a golden opportunity to buy stocks at discounted prices.
There’s Blood in the Streets…
The VIX spiked 65% higher on Monday, which was the second largest one-day percentage increase in history:
Clearly, people are scared right now. But when fear is at its peak, savvy investors know it’s time to buy.
Historically, VIX spikes have coincided with market bottoms, making it the absolute best time to enter the market. Research from RBC Capital Markets shows that when the VIX spikes above 35, the S&P 500 has gone on to rise 6.5% and 14.5% over the next three and six months, respectively.
Those returns are enhanced when the VIX spikes even higher. While the VIX had only spiked to 60 or higher a few other times in history during the Global Financial Crisis and COVID-19 Crash, the forward returns were also compelling. In fact, the S&P 500 was up an average of 29.5% after the previous VIX peaks.
Keep a Cool Head When Others are Losing Theirs
Despite all the hubbub with the carry trade, Magnificent 7 earnings, and last week’s payrolls report, the S&P 500 is still not even in correction territory. In fact, we’re only down 8% from all-time highs.
The S&P 500 is also still up 9% in 2024 and up 26% from the October 2023 lows.
So, while I’ve seen many permabears taking victory laps in the last few days, the right move has been to stay long the last 18 months. And from my view, either the S&P 500 pullback hasn’t gone far enough or the VIX spike went too far… and my money is on the latter.
Overall, successful investors focus on managing risk, not eliminating it. My strategy doesn’t involve avoiding every pullback and correction as it’s mostly a waste of time. During these deep red days, keep your eyes on the long game.
And if you have dry powder, it’s statistically one of the best times to deploy. Because by taking the other side of these fearful bets, you can position yourself for significant gains as the market recovers.
It may feel counterintuitive, but this is the moment to stay calm, assess the fundamentals, and make strategic investments.
Stay safe out there,
Robert Ross
Robert Ross’s unique style of clear and direct stock research helped him build a massive following in the investment research industry, starting his career at investment research company Mauldin Economics and quickly rising through the ranks to become one of the youngest chief analysts in the industry. Today, over a million investors turn to Ross every month for his take on investing, economics, and personal finance. He now shares his unique insights in Total Wealth and Manward Money Report.
