Buy the S&P 500 In 3 Phases – Scale In At These 3 Levels

Posted 8:30 AM ET - The market has seen heavy selling the last three days and all of the gains in January have vaporized. We were long overdue for a 10% correction, but there is usually some forewarning. The price action had a liquidation feel to it. This is an excellent entry point. I would not be surprised to hear that a hedge fund is in trouble because of overexposure and margin calls. I would also not be surprised to hear that trading programs were run in error. The speed of this drop reminds me of the flash crash. Janet Yellen said that assets are "extended" last week. She was careful not to use Alan Greenspan's phrase "irrational exuberance". That soundbite caused a massive market decline in December of 1996. The good news is that the market screamed higher the next four years. Fed officials have been calming the seas the last 2 days. They have stated that they will not change their policy just because the 2% inflation target has been reached. There is no way that the Fed will raise rates in this environment under new leadership (Powell). In their last statement they outlined that three rate hikes are likely this year. The Fed knew the employment data before the last statement and they did not raise expectations to 4 rate hikes. Fed officials also said that credit risks are very low. Earnings have been excellent and guidance has been fantastic. Valuations are not stretched. At this level the S&P 500 is trading at a forward P/E of 16.5. Democrats were blamed for the last government shutdown and they are likely to temporarily extend the debt ceiling/budget in two days. This will spark a relief rally. Swing traders that followed my advice yesterday bought the SPY when it was 20 points off of the low and they were stopped out when it dropped back below that level. We were up more than 150 S&P points in January so we gave a little back. The good news is that it's time to get back in and we can do so at much lower levels. I suggest buying in three phases. Place an order to buy the SPY at $253 (200-day MA), place and order to buy some on the open and buy some if the SPY closes above $263 (100-day MA). The macro backdrop is very bullish and I view this as a fantastic buying opportunity. Option traders need to sell premium because of rich option implied volatilities. I suggest selling out of the money bullish put spreads to finance bullish call spreads. I would go out to April expiration to give this correction time to resolve itself. Day traders need to look for relative strength. My searches help me find stocks that are strong relative to the S&P 500. When the market is going down relative strength is easy to spot. I will wait for the SPY to find support and I will buy these stocks. If my timing is off and the market continues to drop these stocks will hold up well. This is my edge. I can get the market wrong and not get pounded because I have a little extra time to exit. Sometimes I make money on the trade. Apple was a classic example yesterday. I bought shares late in the day and I made money even though the S&P fell 20 points after my entry. Look for stocks with relative strength and it will be much easier to trade this volatile market. I did not imagine a fall of this magnitude. This is a fantastic entry point. Scale in and get long. . .

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