A conflict has erupted in the Middle East and it is escalating rapidly.
We already have civilian casualties on both sides and the real possibility that the US gets involved.
This could cause major disruptions to global oil markets, the economy, and stock markets.
This changes everything about how we should be positioning our portfolios right now.
Our trading strategy is simple but powerful.
When conditions are favorable, we trade aggressively on the strongest S&P 500 stocks.
These are companies with potential to outperform by orders of magnitude.
Think Apple or Netflix in the 2010s, or Tesla in 2020.
But when conditions turn unfavorable, we get defensive.
We initiate fewer trades and focus on setups completely uncorrelated from the broader market.
There’s a compelling reason this works so well.
Take Apple between January 2008 and January 2009 – the stock dropped 60%.
Amazon and Microsoft suffered similar fates.
So, 3 of the most promising tech companies declined aggressively during unfavorable market conditions.
Fast forward to January 2009 to January 2010, and these same stocks posted incredible returns, outperforming the S&P 500 by 3 to 5 times.
This was a prime example of favorable conditions where the strongest stocks posted massive gains
Apple, Amazon, and Microsoft are just famous examples.
There are a lot of other stocks that also massively outperformed during that recovery period.
Our strategy revolves around spotting these opportunities early and ensuring we’re positioned when market conditions turn favorable.
Now we’ll show you some of these setups later, but first we need to tackle the key question:
Are conditions favorable now, despite risks like tariffs, a possible global recession, and a conflict in the Middle East?
The reality is, predicting exactly how each threat plays out is almost impossible.
Take the Middle East situation, for example.
You’d expect a guaranteed stock market decline, right?
But history shows major geopolitical conflicts don’t impact markets as much as expected.
In most cases, stocks are actually higher 1, 3, 6, and 12 months after major geopolitical events.
To cut through the noise, we use a systematic approach at Bravos Research with 3 key metrics to identify favorable conditions.
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1st Metric: Volatility
We want volatility to be low.
In high volatility environments, stop losses get hit much faster than in low volatility periods with smaller daily moves.
For example, when the VIX is above 30, daily moves are 5x than when it’s below 20.
So, above 30, trades get stopped out constantly.
Today, volatility has been falling over recent months and the VIX now sits below 20 – a favorable trading environment.
The concerning sign is that volatility has trended higher over the past year, making conditions gradually less favorable.
With potential Middle East escalation, we could see volatility spike again.
For now though, volatility remains below our 20 threshold.
2nd Metric: Risk-Taking Behavior
The 2nd metric we track is risk-taking.
Without risk-taking from market participants, we won’t see incredible trade returns.
One key indicator we track is the gold-to-silver ratio.
Gold is a risk-off asset investors flee to for safety.
Silver is more volatile and risky, so investors chase it when they feel confident about market conditions.
When gold outperforms silver, markets are risk-off with very little risk-taking.
But when silver outperforms gold, markets are risk-on with active risk-taking behavior.
Right now, the gold-to-silver ratio signals we’re in a risk-on environment.
This is what the gold to silver ratio looks like going back to 2020.
During the pandemic’s start, the gold-to-silver ratio spiked as investors fled to safety.
Then, during the rebound, the ratio fell precipitously.
We’ve seen a similar pattern with tariffs:
The ratio spiked initially but has been falling violently over recent weeks.
More specifically, we’ve just seen the ratio drop 10% within 3 weeks.
This is something we’ve only seen only 8 times since 2019.
It bounced a bit when the Middle East conflict began.
But the pullback is minor so far compared to the big risk-on signal since May.
Now, if we add the S&P 500, you’ll see each of these sharp drops on the ratio has been followed by more upside in the index.
This isn’t a guarantee of course, but just another sign that risk appetite is healthy, which usually supports a rising market.
3rd Metric: Market Participation
The 3rd metric we watch is something called participation.
We want to see a large percentage of S&P 500 stocks climbing higher.
This measures market stability – think of it as the market’s foundation.
Broad participation means a stable, positive environment.
Weak participation creates instability and vulnerability to declines.
Currently, roughly half of S&P 500 stocks are trending higher.
This isn’t impressive compared to 2024 or 2021 levels, but it’s not catastrophic either.
In August 2020, only 40% of stocks were trending higher.
Yet, that was still a great time to initiate trades on the US stock market.
It’s possible that we’re in a similar spot today.
Our Current Positioning
Today, 2 of our 3 metrics are green.
This means roughly 2/3rd of our trades are allocated to US stocks, with some silver and foreign exposure, plus 15% in cash.
Could we get stopped out on many of these?
Absolutely.
To hedge that risk, we’re steadily adding energy stocks.
These are positions that should benefit if the Middle East conflict escalates and the gains here could offset losses elsewhere.
The rest of our active trades include around 10 US stocks we believe will lead if conditions stay favorable – Spotify, IBM, EME, PWR, KLAC, and a semiconductor stock to name a few.
Now, it’s entirely possible that if the market makes a big pullback, we’ll have to stop out many of these positions.
But if low volatility and high risk-taking continue, we’re well-positioned to outperform the S&P 500 over coming months.
View our 2024 track record on our website here.
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