How To Use The VIX To Make Better Stock Picks

NYSE: SPY | SPDR S&P 500 ETF Trust News, Ratings, and Charts

SPY – Be like Buffett and use the VIX to buy fear and sell greed in the SPY.

The VIX finally closed below 30 on Friday and below the 20-day moving average of 31.20. It is also nearing the critical 27.50 area that served as serious upside resistance for most of September until it finally gave way. Earnings from tech bell weathers Apple (AAPL) and Microsoft (MSFT) next week and the Fed rate decision the following week will likely tell the tale regarding direction of both stocks and the VIX into year-end.

I had written an article in late August on how option prices can help predict future stock prices. I specifically used the VXN -or VIX of the NASDAQ stocks- to show how the big pullback in VXN equated to a short-term top in NASDAQ stocks (QQQ), as shown below.

But rather than just calling tops, using an IV based methodology can be a robust market timing tool to use to help discern turning points in the overall market from both a bullish and bearish perspective.

Remember, the VIX and VXN are both measures of 30-day implied volatility (IV) in the S&P 500 and NASDAQ 100 respectively. In this article I will explore how using the VIX can greatly aid in discerning the upcoming market movement for the S&P 500 (SPY)  both to the upside and the downside.

The chart below shows how extended moves higher in VIX towards 35 followed by subsequent weakness has been a bona-fide buy signal in SPY over the past year. Conversely, sharp drops lower in VIX with subsequent strength have been solid sell signals in stocks.

 

The table below summarizes the initial buy signal and subsequent sell signal based on this VIX methodology.

The total P/L for the 5 buy and sell signals is 35.86%, with an average gain of just over 7%. Worst gain was still 3%. Compare that to the overall loss of over 20% in the SPY over the past 12 months.

The average days held for each buy/sell signal was roughly a month. Total time held for all signals combined was less than half a year. So big gains in under 50% of the time using the VIX methodology compared to bigger losses holding SPY all the time.

A new buy signal was generated a few weeks ago as the SPY hit annual lows. No sell signal evident yet, but the unrealized gain on that latest buy signal is now over 5%.

Using the VIX to help tell whether the SPY is at a turning point is akin to the Warren Buffett adage to be greedy when others are fearful and fearful when others are greedy. Certainly, a little of the fear has come out of the market if VIX is any guide. Still haven’t reached the greedy level yet so stay tuned and see what happens over the coming weeks!

POWR Options

What To Do Next?

If you’re looking for the best options trades for today’s market, you should check out our latest presentation How to Trade Options with the POWR Ratings. Here we show you how to consistently find the top options trades, while minimizing risk.

If that appeals to you, and you want to learn more about this powerful new options strategy, then click below to get access to this timely investment presentation now:

How to Trade Options with the POWR Ratings

All the Best!

Tim Biggam

Editor, POWR Options Newsletter


SPY shares closed at $374.29 on Friday, up $8.88 (+2.43%). Year-to-date, SPY has declined -20.28%, versus a % rise in the benchmark S&P 500 index during the same period.


About the Author: Tim Biggam


Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network "Morning Trade Live". His overriding passion is to make the complex world of options more understandable and therefore more useful to the everyday trader. Tim is the editor of the POWR Options newsletter. Learn more about Tim's background, along with links to his most recent articles. More...


More Resources for the Stocks in this Article

TickerPOWR RatingIndustry RankRank in Industry
SPYGet RatingGet RatingGet Rating
AAPLGet RatingGet RatingGet Rating
MSFTGet RatingGet RatingGet Rating
Get RatingGet RatingGet Rating
Get RatingGet RatingGet Rating

Most Popular Stories on StockNews.com


VERY Healthy Stock Rotation Underway

The S&P 500 (SPY) is putting the finishing touches on a strong 2023 campaign. This is the 4th straight year the large cap index has outperformed small and mid caps. Gladly there are signs this is going to change which is a very healthy sign for the longevity of this bull run. 43 year investment pro Steve Reitmeister explains why in his latest commentary that includes insights on this top 11 picks for today’s market. Read on below for more...

3 Financial Stocks to Boost Your Portfolio's Bottomline

The consumer financial sector is experiencing a transformative wave of technological advancements fueled by the rise of fintech companies and digital banking. Amid this swiftly evolving landscape, three consumer finance stocks, Mastercard (MA), Noah Holdings (NOAH), and EZCORP, Inc. (EZPW) could be ideal buys this month. Read more…

POWR Income Stock of the Week: Ternium SA (TX)

The Federal Trade Commission has been on a crusade this year to stop mergers in their tracks with little regard to the size of the merger or the industry it was taking place in. But, with major setbacks being delivered by the courts the mergers and acquisitions markets are thawing, and one industry set to consolidate is the steel industry. This may be a boon for all the steel players involved, and one under the radar income play steel producer is Ternium.

3 Travel Stocks to Watch With Holiday Gains Potentially in the Pipeline

The travel industry is witnessing a surge in cruise market interest, driven by evolving consumer preferences and sustainability considerations. Hence, travel stocks Carnival Corporation (CCL), Royal Caribbean (RCL), and Lindblad Expeditions (LIND) might be sound watchlist additions before the holidays. Read more…

Is It Time for Small Caps to Shine?

November was about as good of a month as a stock investor could ask for. However, still too much of the gains are accruing the same old collection of large cap stocks at the top of the S&P 500 (SPY). Gladly there are healthy signs that small caps are ready to take charge. Get Steve Reitmeister’s take on that subject including a preview of his top 11 picks for today’s market. Read on for more…

Read More Stories

More SPDR S&P 500 ETF Trust (SPY) News View All

Event/Date Symbol News Detail Start Price End Price Change POWR Rating
Loading, please wait...
View All SPY News