Three Reasons Why It Might Be Time to Buy the Stock Again

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Warren Buffett said, “Be greedy when others are scared.” With fear at a high level, now is an opportune time to get a little greedy.

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A month ago, I wrote about how a large drop in implied volatility (IV) in NASADQ 100 (QQQ) stocks had set off a short-term sell signal. This proved to be the case as QQQ is down about 20% in that time frame.

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Similarly, however, large spikes in the IV also indicate short-term buying opportunities. QQQ has currently reached a point that favors a possible rally in the coming months. Let’s take a look at some of the reasons why one can take a step too high.

weather

September has been the worst month ever for stocks in the past decade, especially high-growth NASDAQ names. Now that September is over, the next few months are seeing solid seasonal returns. October and November are the second and third best months of the year for stock performance over the past 10 years.

implied volatility

Implied volatility (IV) has once again reached a recent peak. A look at the measurement of VXN—or 30-day IV in QQQ options—shows that the level is back near the 40 area after hitting a low near 25 in August. You can see how the spikes in VXN over the past year have equated to short-term lows in QQQ.

Fear

The CNN Fear and Greed Index is back near a year’s low of 15 – an extreme fear.

Only last time it was lower in May last year. This coincided with a steep fall in stocks.

The AAII Investor Sentiment Survey is also very bearish. The current bearish sentiment is over 60% which is almost double the historical average of 30%. This is considered a contrarian sign which usually equates to a large stock out-performance in the coming 6 months.

The combination of seasonality, implied volatility and fear is setting the odds in favor of a year-end rally in the stock. Of course, probability does not mean certainty. As I always say, trading is about probabilities, not certainty. But traders who prefer to play the odds want to take a safe bullish position to profit from a potential pop in stocks at the end of the year.

power options

What to do next?

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Best wishes!

Tim Biggam

Editor, Power Options Newsletter

Shares of QQQ closed down $-4.61 (-1.70%) on Friday at $267.26. Year-on-year, QQQ declined -32.49%, while the benchmark S&P 500 index gained -23.93% 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 Market Maker for First Options in Chicago. He appears regularly on Bloomberg TV and is a weekly contributor to the TD Ameritrade network “Morning Trade Live”. His major 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, with links to his latest articles.

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The post Three Reasons Why It May Be Time to Buy Stocks First appeared on StockNews.com



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