Buy The Dip, But Only When THIS Happens

U.S. markets closed down by about 6% yesterday, and the VIX “fear gauge” spiked from 25 to 65 – a bigger spike than during the early days of COVID in 2020. Every major stock market index worldwide was down at least 1%. Japan’s Nikkei 225 index led the pack, down 19.5% over three days.

It was a worldwide market panic. Headlines were full with doom and gloom.

Today, though, markets recovered. The Nikkei, Nasdaq, S&P, and Dow were all in the green, while the VIX fell back down to the 20s. So, naturally, the headlines flipped to “buy the dip.”

Neither is good advice. This probably isn’t another COVID-crash in the making.

But it’s not an opportunity to buy the dip yet, either. 

Here’s why, and when it will be time to get back in…

As part of the Benzinga Options School, I give members access to my dashboard of market indicators.

Chief among these are the Bull/Bear Pivot Level and the Top Gamma Strike, which tell me whether bulls or bears are in charge of the market, and so where the market is going next.

Here’s what that looks like as I’m writing this on Tuesday afternoon:

With SPY – the S&P 500 ETF – currently trading at $529, you can see we’re below both indicators.

That means “the puts” are currently in control, meaning the market is being driven by traders using put options to profit from, and drive, the market down.

Until SPY gets back up $540 at a minimum, there’s no point in adding any bullish investments to your portfolio. Don’t buy this dip – not until we hit that $540 mark.

Instead, use the smaller rallies to come as opportunities to sell into resistance. Expect lots of volatility and forced selling.

This is a great time to revisit your risk management approach, and to look at your portfolio with a view to cutting bullish exposure (during those smaller rallies) and look for protection in “safe haven” investments instead.

Focus on what you need to do, rather than on potential profits and losses. Stay calm, and your portfolio will come out the other way better positioned than you were before.

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Photo Credit via MidJourney