Last week witnessed an equity market surge that rivaled some of the best weekly advances in history, with the S&P climbing more than 6% and the Nasdaq rising over 8%. The substantial gains were welcomed by bullish investors with open arms as the major indices have had a rough start to the year.

The VIX Index, commonly referred to as the ‘Fear Gauge’, had spiked more than 100% by early March from the beginning of the year as the Russia-Ukraine conflict and inflation concerns weighed on markets. The VIX generates a 30-day forward projection of volatility. It is derived from the prices of SPX index options and represents expectations for short-term price changes in the S&P 500.

As of yesterday, the index has fallen six days in a row and has plunged more than 40% from the highs. In other words, the market is expecting price ranges to narrow in the near-term, which is a common theme when stocks are rising. While not always the case, normally volatility is low or trending lower as stocks rise and typically trends higher as stocks fall. The old market adage speaks to this - stocks take the stairs up and the elevator down.

Over the past year, spikes in the VIX have represented solid opportunities to buy as volatility hasn’t remained elevated for too long. In addition, the VIX Index spent an extended period of time above the 30-price level – 11 days to be exact. What can we learn from prior instances in which the VIX spent considerable time above this level?

Image Source: Zacks Investment Research

According to LPL Research, there were 12 past instances in which the VIX spent at least 11 days above that level. Three months later, the S&P posted an average gain of +8.9% and was positive 83.3% of the time. Looking one year out, the S&P delivered an average gain of +21.9% and was positive in 11 of the 12 (91.7%) instances. Quite the striking statistic that bulls like to see.

Since the March 8^th closing low in the S&P 500, it’s been interesting to see what has led the way back up as equities have regained some of the lost ground. The most oversold names that were hit hardest this year (including Chinese equities and domestic growth and technology companies) have displayed relative strength and directed this leg back up.

While buying solid companies that are undervalued certainly has merit, taking somewhat of a ‘wait-and-see’ approach in these high-growth companies is warranted in this volatile and unpredictable market environment. A much more prudent approach in terms of new trade initiations is to target stocks that are leading this market and are breaking out to new 52-week highs.  

Keeping track of leading industry groups can help us identify stocks that are breaking out to the upside. It's no secret that investing in stocks located within the top-performing industries can provide a boost to portfolio returns. This phenomenon has been well-researched and documented, consistently illustrating that about half of a stock’s future price appreciation is due to its industry grouping. Our own Zacks proprietary study has shown that stocks contained within the top 50% of Zacks Ranked Industries outperformed the bottom 50% by a factor of more than 2 to 1.

The Zacks Manufacturing – Farm Equipment industry group is currently ranked in the top 39% out of approximately 250 industries. Take a look below at this group’s favorable characteristics:

Image Source: Zacks Investment Research

Let’s take a deeper dive into two stocks that are backed by this leading industry group and are breaking out to new 52-week highs.

Titan International, Inc.

Titan International is a global manufacturer of wheels, tires, and undercarriage systems and components for off-highway vehicles. The company operates in North America, Europe, Latin America, the Middle East, Africa, and Russia. TWI offers components for agricultural equipment including tractors, skidders, plows, and irrigation equipment. Titan International was founded in 1890 and is based in Quincy, IL.

A Zacks Rank #1 (Strong Buy) stock, TWI has surpassed earnings estimates in each of the past eight quarters. TWI most recently reported Q4 EPS earlier this month of $0.39, a +116.67% surprise over the $0.18 consensus estimate. The company has delivered a trailing four-quarter average earnings beat of +47.62%, supporting the stock’s 66% advance in the past year. Despite the firm’s remarkable performance, TWI trades at just a 12.78 forward P/E. The agricultural equipment manufacturer is relatively undervalued when compared to its industry average (17.87).

Image Source: Zacks Investment Research

DE is the 67^th largest company in the S&P 500, sporting a $133.04 billion dollar market capitalization. Earnings surprises are a bright spot for the machinery manufacturer, as DE has beaten estimates in each of the past ten quarters. The company most recently reported fiscal Q1 EPS of $2.92, delivering a +28.07% surprise over the $2.28 consensus estimate. During the past four quarters, DE has posted an average earnings surprise of +20.59%. Shares have risen in stride, advancing nearly 23% in the past year.