Transcription
On April the 2nd, Donald Trump will be implementing a series of new tariff policies. The US Stock Market has already lost approximately 5 trillion dollars of its market capitalization since the president initially started talking about these tariffs. Now, some expect that April 2nd will mark the bottom of the stock market correction, ending the uncertainty around tariffs. While some believe that it's only going to be triggering another violent move down in stocks.
Now, our gut feeling today at Bravo's research is that the stock market is indeed coming very close to a short-term bottom and potentially already bottomed yesterday, on the 31st of March. We also think that coming out of this correction, we'll see the stock market rally quite quickly back to all-time highs. But a gut feeling is not what makes us profitable. Traders trading profitably is about constantly weighing the risk versus the reward of your decisions. And the truth is, there are still very real risks in today's market, as I'm going to show you in this video, which is why for now we still have quite a defensive posture with our trades at Bravo's research.
You see, over the course of the last 15 years, every single major stock market bottom has been accompanied by a very specific development; something that signaled the stock market had reached an extreme state of panic and was actually setting up to bottom out and make a huge rally. In each of these cases, one could have initiated aggressive bets on the market to leverage the huge rallies that followed. But we have not yet seen this signal trigger today, and while that doesn't guarantee that there's more pain to come, it certainly isn't making us very comfortable right now.
This signal can be found on an indicator called the VIX, or the volatility index of the S&P 500. This is a very famous index that essentially shows us how options traders are betting on the S&P 500. If traders are making bets for huge moves on the S&P 500, the VIX will be very elevated; if they're making bets for very small moves, the VIX will be low. Now, typically, you see the VIX spike to extremely elevated levels at the heart of market panics. We can see that all of these major spikes in the VIX actually coincided with major market bottoms.
The nature of the stock market is that the moves up in stocks typically occur very steadily, as they price in the fact that the economy is growing in a very steady fashion. The moves down in stocks typically occur much more violently, as investors get concerned about perhaps a specific event that could damage growth. This is why when the market is rising, you typically have low volatility environments, and when the market is falling, you typically have a higher volatility environment. And usually what happens is that the very bottom of the market coincides with the moment where investors are the most concerned about growth, and so market bottoms tend to be associated with extreme levels of volatility.
Now, in this recent stock market pullback, we can see that the VIX spiked to about 28, which is actually not a very high level of volatility when we compare it to the spikes in volatility of pretty much every single other major bottom we've had since 2009. All of these saw the volatility index spike above 30. It's only at around 30 where we can really say that the market has reached an extreme state of panic and is very likely to start bottoming out. The only moment where the stock market dropped by over 10%, like today, but without the VIX spiking above 30 was actually recently, in the summer of 2023.
Now, could it be that we're just seeing a repetition of what happened right here, with volatility set to come down to very low levels, just like it did in October of 2023, when the stock market was ready to recover back to all-time highs immediately? We're certainly not ruling out that possibility. One of the key driving factors behind this market correction and this spike in volatility has been the uncertainty around Donald Trump's tariffs on April 2nd. All of the uncertainty that was caused by tariffs will most likely have dissipated, which will allow nervous investors who sold during the market correction to potentially get back into the market and lead volatility lower as the stock market moves higher. This is what you call a buy the news event, where the stock market declines heading into a specific bad news event, and once that bad news has passed, the stock market looks towards a brighter future. This is extremely typical market behavior, as I mentioned at the beginning of this video.
Although it is our base case that stocks will perform well after April 2nd, we are still positioned defensively. For us to be more confident in the market, we want to see the VIX come down below 15. The reason we're looking at 15 is because this can be qualified as a low volatility environment. It's in these kinds of environments, with low levels of uncertainty, where we can expect the stock market to perform well day after day after day and form a very steady uptrend, just like it did throughout 2023 and 2024. But right now, we're not in a low volatility environment, and we've also not yet seen an extreme state of panic, which would tell us the market is probably bottomed.
Believe it or not, Donald Trump's tariffs are not the only factor at play in financial markets right now. There is something else that many people are overlooking that could drive market volatility higher, and that is US technology companies. Technology companies now make up a record 40% of the S&P 500. Now, there isn't anything inherently wrong with that, given that these are very strong companies. What is more concerning, however, is that they've gotten quite a bit expensive over the last couple of years, making them vulnerable, and so, by extension, making the S&P 500 vulnerable. And we've seen this vulnerability in the recent market correction. The technology sector of the S&P 500 saw its valuation drop from a price-to-earnings ratio of about 30, which was one of the most expensive valuations for these stocks since the bubble, down to 25. This big decline in tech stock valuations certainly contributed to downside in the recent market correction.
Now, the problem is that if we overlay the overall S&P 500 price-to-earnings ratio, we see that technology companies are still trading at a significant premium relative to the rest of the market. Throughout most of history, going back to 1995, we've seen the S&P 500 PE ratio be about the same as the technology sector's PE ratio. We've seen gaps occur between the two quite a few times, but eventually those gaps get closed. We think this kind of deflation in tech stock valuations is still a very real risk in today's market, which is another reason why we're not 100% ready yet to jump back into the stock market.
But as soon as we do have enough evidence that stocks have indeed bottomed, we'll actually be looking to get aggressively long on stocks because we happen to think they have plenty of potential upside in 2025, as the economy ends up being a lot more resilient to tariffs than people think. And so we'll be rotating out of the more diversified positions that we currently have. We have exposure to trades on gold that have been performing incredibly well over the last few months. We've been long on Chinese stocks and companies like BYD, that is currently up about 40% since we initiated that trade, and we've been long on US energy companies that have actually been benefiting from this entire tariff situation.
Our mission at Bravo's research is to make sure that we're making each and every one of our clients as profitable as possible and also hedging against the risks that we see in the market. Last year we had an extremely strong performance on our trades, with many yielding over 30% returns. You want to have access to all of our trades and learn everything that we know about markets; click on the link down below and join our community.