What's the BTFD Strategy?

03/21/2014 6:00 am EST


David Moenning of StateoftheMarkets.com offers his take on the current market environment and shares how a very simple strategy has proven to be really profitable since 2011.

Another day, another crisis averted. Phew!

In case you were out and about or weren't glued to your Twitter feed at approximately 8:00 am eastern time Tuesday, comments made by Russian President Vladimir Putin were the source of a second straight up on Wall Street. Within minutes of Putin saying he does not have an interest in acquiring any more Ukrainian territory, stock futures went from red to green. And just like that, the latest crisis appears to have been put to bed.

Okay, to be fair, that may be a bit of an oversimplification of the situation in Russia/Ukraine/Crimea. Remember, next week the G-7 is meeting to discuss what they are going to do about 96% of a region wishing to return to Mother Russia. And there is little doubt that there will be plenty of tersely worded statements, some sanctions, and maybe even an ultimatum or two. Remember, politicians hate to waste a good crisis!

Getting back to the stock market, the S&P has spurted higher this week and is within a stone's throw of a new all-time high. But it is important to recognize that the venerable index may not home free just yet. You see, our furry friends in the bear camp are quick to point out that there is some resistance overhead on the charts, that this thing in Crimea probably isn't over, and oh yea, China is likely to become to be a problem—and soon.

Insert Eye Roll Here
If you wound up rolling your eyes at that last sentence, join the club. Yes, the current bull market is growing older by the minute. Sure, Crimea, China, the Fed, the economy, or anything else for that matter, could easily become the next real problem for the market. And it is true that "trees don't grow to the sky." However, something the perma-bears hate to admit is there is an awful lot of money to be made when the bulls get on a roll.

Granted, risk is rising. And it is also true that the cycles are calling for a meaningful correction to begin sometime this year (somewhere in Q2 to be accurate). But staying out of the market because stocks have been going up for a while doesn't make a lot of sense.

NEXT PAGE: An Easy VIX Indicator to Follow


What's a Worrier to Do?
Take a look at the chart below. This is a picture of the S&P 500 on a weekly basis since 2011. By definition, that's a pretty bullish chart, right? And since the August 15, 2011 low, the S&P is up 67%. Not bad, eh?

S&P 500 Weekly

Click to Enlarge

The problem is that in August 2011, the sky was falling. The pain of 2008-09 was still fresh. Europe appeared to be imploding and the debt rating of the good 'ol USofA had just been downgraded. Yikes.

But in hindsight, that "dip"—painful as it was at the time—turned out to be a pretty good buying opportunity. As did the two dips in 2012, the less obvious pullbacks in 2013, and the little dip seen in January 2014.

BTFD, That's What
So, if you find yourself underinvested in stocks and jealous of those who have made big money in the market of late, consider the B.T.F.D. strategy—just buy the freaking dips. (BTW, if you want a good laugh and aren't put off by a fair amount of foul language go ahead and Google "BTFD.")

The only problem with this approach (well, besides the obvious need for the approach to be married to some kind of a risk management strategy) is that it is tough to tell when a dip is over. This is where the VIX comes in.

An Easy VIX Indicator to Follow
Anybody who follows the market closely knows that when the VIX spikes, stock prices go down. And vice versa; when the VIX falls, stocks go up.

So, while this approach is more than a little rudimentary, buying stocks after the VIX has first spiked and then reverses can be a decent way to BTFD. See for yourself.

S&P 500 Daily

Click to Enlarge

VIX Daily

Click to Enlarge

The two charts above illustrate this idea pretty nicely. The VIX spikes and stocks go down. Then the VIX recedes and stocks improve. Note how the spikes in the VIX correspond to the opportunities to BTFD. Pretty simple, right?

However, before you let visions of buying every pullback on the low start to dance in your head, understand that the game isn't quite that simple. Sometimes the VIX is so low that the spike doesn't hit the magical 20-level. And then there are times that the spike only lasts a few days. Thus, the question becomes, is that a dip worth buying?

So, next time we will apply some fancy math to this idea and see if we can't come up with a good way to use the VIX to help you BTFD on a consistent basis.

Teaser alert: The indicator has "nailed" the dips since 2011 and gave a buy signal at Monday's close.

By David Moenning of StateoftheMarkets.com

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