• The 4th 50dma dip in S&P 500 of 2021.
  • Longer term, we are not past the stock market peak.
  • Short term, we could see a deeper correction to 200dma.
  • But it’s more likely that the uptrend support holds – buy the dip.

We have a dip

So, we have another dip in S&P 500 (SPY) approximately 4% drop from the highs (before open futures markets are extending the drop towards the 5% level). Technically, this is the classic uptrend dip to to the 50dma, the 4th in 2021. During the previous 3 dips, the 50dma uptrend support held, and proved to be a good buying opportunity.

Is this time different? Are we going to finally have a deeper correction, possibly down to the 200dma, which would be the first correction of this mini-cycle? I don’t think we will have a deeper correction, so this is a buying opportunity.

Here is SPY chart that shows the ley levels:

Data by YCharts

The bear case

First, we need to understand the cause of the current dip.

  • Inflation: Obviously, the financial media has been talking about the inflation as the major risk. We had a “very hot” US CPI reading on March 12th, on which day the stock market sharply drop. The reasoning provided is that a higher than expected inflation, and a more permanent inflation, will force the Fed to prematurely tighten the monetary policy. Yet, the Fed has been clear, they expect the inflation to be transitory, and they will ignore the current inflation readings. Further, this was an expected event, already priced by markets. The yields on 10-year T-Note rose only slightly, still below the 1.75% level, so this was not the “news” for the bond market. Thus, I would not be worried about inflation at this time.
  • Peak US growth: On Friday last week, the employment numbers significantly missed the estimates, which some think might mean that we are already past peak re-opening, and thus peak growth. I think that reopening will be more complex that predicted. Many laid-off employees prefer to get the boosted unemployment benefits, rather than returning to work. But this will all normalize. We could be in a peak-growth quarter, but economic growth will stay strong in a foreseeable future.
  • Stagflation? if you combine higher inflation, with slower employment numbers, some will see a stagflation forthcoming. Again, it to early to make this forecast, given the volatile data, and the volatile reopening.
  • Cyber attack: This is something that few are seriously considering as a major cause the the current dip. But, the fact is, over the weekend the major US pipeline (Colonial) that supplies gas to the New York area and the East Cost had a cyber attack, which caused a significant supply reduction of gas. So here are questions: Are are more cyber attackers forthcoming? Who did it? How is it even possible to have a major attack like this? All of this information is not priced in.

So, what do we know? The stock market had a sharp 3-day drop since the weekend, but also the VIX increased by almost 50% over the same 3-day period. This tells me that there was an event not priced in, which could cause more selling. And that event is not related to inflation, it is mostly related to the cyber attack.

Here is the chart of VIX (VXX):

Data by YCharts

The bull case

First, the probability of a recession over the next 12-18 months is close to 0%. Thus, we will not have bear market any time soon, and we are not past the peak in the US stock market. Thus, longer term investors should stay invested in stocks and ignore the short term volatility.

Will there be a deep correction? If the spike in VIX is related to the unknows of the pipeline cyber attack, than we have a peak volatility since the Colonial pipeline is gradually getting back in service. Clearly, if there are more cyber attacks forthcoming, we could have more volatility, but even so, the VIX has already priced severe negativity. 

If the spike in VIX is related to inflation, or stagflation, than this is clearly a buying opportunity. The VIX stays above 20, and spikes higher only during recessions. Since, we don’t expect a recession anytime soon, this possibly represents peak volatility and possible opens of the possibility of large stock market gains as VIX retreats below 20. The Fed has been clear that they would not act on current inflation numbers, and we will not know if the inflation pressures are more permanent for many months down the road.

Thus, I think, like in previous 3 cases in 2021, this is another opportunity to buy the 50dma dip in S&P 500.