Seasonality says to definitely go short real soon...
August 17, 2024
How to Play the Next Huge Volatility Spike
By Michael Salvatore, Editor, TradeSmith Daily
We're in a period of heightened seasonal volatility in the markets.
And we'll never tire of reminding you about it, because it's truly significant.
The CBOE Volatility Index (VIX) is set to climb more than 57% from now through the end of October, according to our seasonality tool:
In other words, we should expect more surprising price action as we near the election. So, while markets have bounced back strongly from last week's correction... in all likelihood that was just the first act.
At TradeSmith, we use data to show us how to adapt our approach given the conditions we're likely to face.
And when markets are poised for big, quick moves, you want to capture them just as quickly and with an appropriate amount of leverage.
For example, our seasonality and cycles tools signaled a very quick window of bullish opportunity. So, our resident cycles swing trader, William McCanless, recommended a six-day trade on the S&P 500 in his Trade Cycles service.
Because he used a leveraged ETF – the ProShares UltraPro S&P500 (UPRO) – the trade returned 12% in those few days... plus another 50% on UPRO call options.
This mode of trading is perfectly suited to seasons of volatility. And William's nailed a number of key market moves these past few weeks, in which subscribers also gained 68% on another UPRO call option, 44% on Old Dominion Freight Line (ODFL) calls, and 74% on U.S. Natural Gas ETF (UNG) puts, each in a matter of days.
I recently caught up with William to ask more about his personal swing-trading strategy. In addition, we talked about bitcoin – one of his few core buy-and-hold positions.
We've transcribed our interview below. Read on and enjoy...
Michael Salvatore, Editor, TradeSmith Daily: William, we're recording this just after 9 a.m. and just before market open. You've said before that you primarily trade the market open. Can you share with our readers why these first hours are most important?
William McCanless, editor, Trade Cycles: I usually scan for trades before the market opens and then if I'm going to get into a new trade, I'll do it after the market opens. I'll usually wait about 15 to 30 minutes though, just so the spreads tighten.
[By this, William's referring to the difference between the bid and ask prices of any given asset shrinking, so order execution becomes more reliable.]
Now, I live in Thailand, so when the market opens here it's already around 9 p.m. I'm normally sleeping by the middle of the trading session – so that's one reason why the first hour is when I am going to get into or out of a trade.
But also, my trades rely on very precise timing. If I know a trade is ready to go based on my criteria, it's usually best to get in during the morning time because often we'll see a trade take off after that. If we wait until much after that, by then the ideal entry is gone.
Michael: Your strategy is best described as swing trading. You seek out assets set to move in a matter of days or weeks, with the goal of making profits that well outpace a buy-and-hold strategy.
Why do you prefer this strategy... and why is it worth the extra effort to trade actively?
William: Well, here's an example of why.
On July 17, I sent a warning out to my subscribers that the market was about to drop. So we got out of all of our long stock positions around 10 a.m. U.S. time.
That was pretty much the exact top of the market, and SPY proceeded to tank. It was down almost 10% at the lows.
But before things really got too bad, on July 29, we were already starting to short the market. That's just because for over 150 years of market history, stocks usually go down starting in mid-July and then they start to stage a strong rally around Oct. 27.
So the simplest money-making strategy in the world would be to just sell SPY in July and then buy it again in October. That's an active strategy that would make you far better gains than simply staying in stocks year round.
Not only that, but if you had strong historical and statistical evidence that stocks go up or down in a given time period – why aren't you making money when they both go down AND up? If you expect the market to drop 10%, then why not buy a straightforward put option or buy an inverse ETF and make money on it?
My opinion is that swing trading actually doesn't take as much time or effort as people think. Sure, you could just do nothing... but then when there' s a drawdown like last week, you're just sitting there, taking it.
And by using some simple tools and basic seasonality data you don't have to be a genius to make money on the long and short side and get in and out of good trading opportunities.
Michael: Let's talk shop about the market a little bit. We just went through one hell of a correction, which the seasonality charts of the VIX and S&P 500 did forecast, as we've been showing in TradeSmith Daily.
Now we've climbed back out very quickly, but there's still plenty of volatility ahead on those charts. What do you make of that – do you think markets could wind up lower by the end of October?
William: Well, on Aug. 6 in Trade Cycles, we went long UPRO, which is a bullish leveraged SPY ETF – and that was the exact bottom of the down move in SPY. We closed that call option position for about a 50% gain on Aug. 14.
Now, though, we'll definitely be looking to go short again soon.
One of the main reasons is because I'm looking at 20 years of history that are all 90% or above correlated with the current year's price action. And they include some very scary years: 1929, 1987, and 2007.
Here are all the years I mean, along with their historical correlation...
● 1929 – 93%
● 1936 – 94%
● 1945 – 94%
● 1946 – 90%
● 1955 – 95%
● 1959 – 92%
● 1964 – 91%
● 1986 – 96%
● 1987 – 94%
● 1993 – 90%
● 1996 – 93%
● 1997 – 93%
● 1998 – 93%
● 1999 – 92%
● 2007 – 91%
● 2013 – 90%
● 2014 – 92%
● 2017 – 93%
● 2018 – 90%
● 2021 – 91%
Those are incredibly similar trading patterns to 2024.
When you plot these years out to where you get an average price, then what you see is that the market has a quick bounce (like we just saw) that ends around Aug. 15–20 with another huge leg down into Oct. 26.
I'll add that in 1929 (the crash that kicked off the Great Depression) and in 1987 (which was host to one of the sharpest declines in market history), the bloodbath started around September and stocks hit their bottom around the end of October.
If these correlations continue and the market keeps trading with its typical seasonality, then the market should be down by the time Oct. 27 rolls around, in which case it would be time to get long again.
Michael: I always love chatting about bitcoin with you, even though you treat it very differently than your core trading strategy. That's a big buy-and-hold for you, one of the few assets you commit to buying and holding for the long term.
Its performance this year has disappointed a bit. After breaking out to new highs, it's kind of been waffling around between $50k and $70k. Similar question to the above – do you think bitcoin ends the year higher or lower from its current price, which I have here as around $61k?
William: On our last interview, you'll remember I told you bitcoin was going to disappoint a lot of people and that I expected it to hit either $52k or $48k before it started rebounding.
Well, it hit just shy of $48k on Aug. 5.
We're long a leveraged Bitcoin ETF now, ProShares Ultra Bitcoin (BITU). I expect BTC to pierce through new highs between now and the end of the year and then go on a run to $100k or above.
Michael: I can't wait to see how that turns out. Thanks for chatting today, William.
Our TradeSmith seasonality forecast has bitcoin rising 39% by the end of the year after a big dip soon to come – settling at about $85k just by New Year's Eve.
With William's trades going so well, naturally his subscribers have been asking to "look over his shoulder" and learn how to spot those opportunities in TradeSmith, too. He recently published his "Ultimate Swing Trading Tutorial" for them on his Trade Cycles website...
And he's got a free presentation about the cycles and seasonality strategy at this link, too.
You'll see how he finds seasonal trades, how he scans for opportunities, and how he qualifies trades and manages risk. Watch for free at this link.
To your health and wealth,
Michael Salvatore Editor, TradeSmith
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