Is It Time to “Buy the Dip?”

Federal Reserve Chairman Jerome Powell

Stocks roared higher this morning after dropping over 2% from their Monday peak.

If the market can hold onto its gains, bulls will have completed one of the quickest “dip fills” of all time.

Tech stocks, in particular, regained ground this morning despite selling-off significantly over the last few days. Renewed economic growth concerns brought investors back to pandemic overachievers like Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL), both of which surged.

Many Dow components, on the other hand, only added to their losses. Analysts were quick to point to Wednesday’s Fed minutes release as a major catalyst for the recent volatility.

“With Fed tapering coming while delta variant keeps spreading, the transition away from liquidity/policy regime to more mid-cycle markets means we may experience a bumpier ride ahead,” explained Barclays equity strategists in a note.

“Market narrative may thus turn more cautious, as concerns about peaking growth rates, Delta variant and policy mistake may prove headwinds, at a time where seasonality and technicals are unfavorable.”

In an ordinary, pre-Covid bull market, corrections of 10%-15% are not unheard of. They’ve lasted several weeks or months in the past as enthusiasm cooled.

Now, however, bulls don’t have the patience for pullbacks of that nature. The Wednesday-to-Thursday “dip-n-rally” was primarily driven by options traders, most of whom anticipated a rough August options expiration day (today). The resulting long gamma erosion led to a major seesawing of market prices.

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But today, long gamma bulls retook control. New market highs seem probable (if not inevitable) given the multitude of “snap back” rallies this year.

Does that mean America’s economic problems are going away any time soon? According to Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, plenty of market hazards remain.

“There are a lot of risks out there right now. First of all, the market is looking stretched from a valuation perspective. It’s continued to make record highs, even amidst some of the volatility that we’ve seen,” she said.

“But we do have some economic concerns right now, just from the supply chain perspective, the inflation perspective. These things are probably going to be a problem for us longer than we had anticipated. I think the biggest concern in the equity market would be a taper tantrum,” Horneman added.

“Interest rates are so stubbornly low. And I think that markets are just waiting there to see if we get some big move higher in interest rates.”

Analysts seem to agree with our prediction that the good times will keep on rolling until the Fed officially makes its taper announcement – something that’s expected to occur at the conclusion of the September FOMC meeting.

And traders routinely ask the following question (which is fully warranted) about our prediction:

“Won’t stocks sell-off in anticipation of the taper warning?”

They certainly might. If this year’s market performance is any indicator, though, bulls should be more than happy to keep their blinders on until the fat lady (Fed Chairman Jerome Powell) sings on September 22nd, just three trading days after September’s options expiration date (the 17th) primes equities for another rapid meltdown.

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