This is the first time some traders are tasting volatility for a while — they’ve been conditioned to buy the dip and chase momentum stocks.
To be honest with you, from what the data is telling me, it’s a pretty solid idea.
You see, there’s a pattern I noticed this week — and it’s one the shorts, permabears, and “doom and gloomers” do NOT want you to see.
It’s such a bullish chart, and I’m surprised no one is really talking about it.Let me show you what I’m talking about, and what it’s so crucial to focus on the data.
If there’s one chart I can point to that signals where the market will most likely head it’s the Invesco S&P 500 Equal Weight Industrials ETF (RGI) and the Invesco S&P 500 Equal Weight ETF (RSP).
More specifically, I’m comparing the two to show reveal to you why stocks can head higher, and you just have to know where to look.
Take a look at RGI in relation to RSP.
In my opinion, the equal-weighted charts tell a broader story. This ratio shows us there is healthy rotation into specific stocks… not a scenario in which the entire market collapses.
Just to be clear, it’s not consumer staples breaking out in relation to the market. That would actually be a characteristic of a weak market. This rotation is into the offense-focused sector.
For example, RGI includes names such as FedEx Corp. (FDX), United Parcel Service (UPS), Deere & Co (DE), just to name a few.
To me, the pullback in tech is just hedge funds and institutions looking for other areas of opportunity.
While the market has seen some volatility in the last few sessions, I’m not too worried about it. Another chart I’ll be focused on is the QQQ:TLT.
Unless I see the QQQ:TLT ratio break below that green box and continue lower, I don’t think there’s a reason to start fearing a market crash.
I know what you’re thinking, “How does this all help with becoming a better trade?”
Well, if you can figure out where the money is flowing into and focus on the data, I believe it’s possible to uncover some hefty winners.
For some traders, it’s been their first taste of volatility.
At one point, it started to feel as if the market can continue higher — when traders are conditioned to buy and it doesn’t work to their favor…
They start to panic and get wamboozled by the market. The panic tends to subside, and the calm, cool, and collected traders tend to prevail.
When it comes to volatility, there’s one gauge all traders look to, and some are saying there have been warning signs.
For me, I don’t try to listen to the talking heads and those who don’t have skin in the game. Instead, I focus on the price action…
And there are specific levels I’m going to keep my eye on, which can signal where the overall market is headed.
Traders are back to buy the dip mode, and the CBOE Volatility Index ($VIX) is pulling back today. Remember, one day does not constitute a trend and that’s why I believe it’s crucial to focus on the $VIX right now.
If you don’t know what the $VIX is, it’s the market’s indicator for expected volatility in a 30-day window.
When the S&P 500 rises, the $VIX falls, and vice versa.
With the CBOE Volatility Index between the 20-30 range, it’s an indication traders do believe volatility can pick up. With the $VIX breaking about 30 last week, it signaled there was fear in the market and traders may start to panic.
It’s been a pretty shaky few sessions, and that’s why I’m solely focused on the price action.
With the $VIX, I think it makes sense to fade volatility if it stays above February highs (around 3,400).
I think if those February highs hold, there are good risk-reward setups to fade volatility, such as.
I think the $VIX will have a hard time trading above 45 and if it does, I have a harder time envisioning it staying there for too long.
Rather than short volatility without hedging, with a bear call spread, the risk is defined and if volatility violently explodes… those who place a bear call spread will know their maximum loss.
The key levels I’m watching right now are 35 (a potential area to fade in the $VIX). If the market continues to bounce, I think the $VIX can break below 20 and maybe get back around the long-term average around the 13-15 range.
With a bear call spread, if $VIX collapses, then the premium would get sucked out and the bear calls would generate a hefty return.
With volatility picking up late last week, traders probably wondering if this is just a correction…
Listen, I don’t believe it makes sense to just go out on a limb and let emotions get the best of us.
That’s why I just focus on the data and the charts…
The price action actually uncovered a unique opportunity, and there is one specific sector on my radar.
You see, something weird happened last week.
The Nasdaq, as well as some of the major large-cap U.S. Indexes, were under pressure for a couple of days.
But there was one specific sector that was outperforming.
Looking at this a little deeper, if Financials were ever going to start to outperform, this would be a perfectly logical place for that to start. In fact, this is exactly where they started to outperform after the Financial crisis…
The great Louise Yamada often says, “The bigger the collapse, the longer the need for repair”. And when it comes to market collapses, the great financial crisis was exactly that.
Can you believe that it’s already been over 11.5 years of basing?
That’s a long time.
Listen, there’s one thing I want you to keep in mind…
Financials does not mean banks. There are different subindustries and they all differ from each other.
For example, insurance is performing relatively strong against the S&P 500…
While regional banks, brokers & exchanges, and financials have been making lower lows (in terms of relative strength).
Right now, insurance is showing a little more relative strength in comparison to its peers.
That’s why there are specific levels I’m watching in some insurance names.
Willis Towers (WLTW) has always been a leader in the re-insurance group. I like it long if we’re above $213 with a target above $257.
You see, the 161.8% extension level is right around $257. If the stock gets above $213, I wouldn’t be surprised if it explodes higher.
Marsh and Mclennan Co. (MMC) is another leader in the re-Insurance space. I like MMC long if it’s above $120 with a target above $148.
The $120 area would signal MMC is breaking out, and if it stays above… I think it can reach the Fibonacci extension around the $148 level (the 161.8% extension level).
Last, but not least… Berkshire Hathaway (BRK/B) is on my radar because it’s definitely got some insurance and re-insurance exposure.
It is also the largest holding in the Financials Sector Index Fund, representing over 13% of the Index. If BRK/B is above $192, I see little reason to be bearish Berkshire, or stocks in general.
Listen, there are so many opportunities out there… you just have to know where to look and understand how to utilize chart patterns.