Last week, I had conversations with investors who were frantically shopping for equities. They were looking for stocks to buy on the dip. Yet, one would have to squint hard to see a dip in the indices. Many were even wondering if the correction is over.
How about we let it start first before we call it over? Nevertheless, this is a perfect environment to find stocks to buy. The trick is find ones where others aren’t looking yet.
The opportunity this week is about the big picture. This also will center around the outcome of the Federal Reserve event in Jackson Hole. Wall Street will be on edge every minute going into it. How investors interpret the outcome will cause wild action in U.S. bonds, currencies and commodities like gold. However, there are stocks to buy going into the event to capitalize on the emotional response coming out of them.
Binary events especially from the Fed are like earnings reports for specific companies. We don’t know what they are going to say, nor do we know how people will react. In this case, there is a good chance of a positive response to Jackson Hole regardless. It is worth taking a few upside bets into it, or on a negative knee-jerk drop.
There is so much tension building up into it that any news will bring a release pop. I don’t believe the markets are awaiting good news. Investors are nervous about the potential disaster, and it’s not likely to come. Under the leadership of Jerome Powell, this Federal Reserve has gone out of its way to baby the market. There is very little chance they switch strategies now when it counts most.
Many experts are expecting them to pre-announce their taper schedule. My bet is that they won’t, and if they do, it’ll be very mild. The reaction in equities should be a relief causing a sharp spike. Those are usually not sustainable, but in this case it could launch a fresh breakout.
Therein lie the opportunities for today’s stocks to buy into the Jackson Hole event. They are:
Stocks to Buy: Invesco QQQ Trust (QQQ)
Source: Charts by TradingView
The Nasdaq has had a few great moves this year. Some were bad like what happened in early March. But others were great like the 5% July rally. There could be another one of those great ones coming starting this week.
For the last five weeks, the QQQ has been hovering at the very top of its range. This brings a lot of energy into motion and all it needs is a spark. The resulting relief pop usually fades, but this one could actually trigger another 4% leg higher.
If it were to happen, the upside target could extend much higher. There are some mega-cap stocks like Amazon (NASDAQ:AMZN) that are lagging. Moreover, Apple (NASDAQ:AAPL) is also flirting with a trigger breakout lint that could really send it.
Whether it’s the swing trade from Amazon, or out-performance from Apple, or continued brilliance from Microsoft (NASDAQ:MSFT), the opportunity is there. Conversely, any downside of this is likely to be shallow. Nothing has changed since 2018. Even though we went through a pandemic, they are buying every dip. Even if we stall we will find footing and revisit this conversation within two few weeks.
iShares Russell 2000 ETF (IWM)
Source: Charts by TradingView
The second opportunity today is the mirror image of the Nasdaq’s brilliance. All year, the small-caps have lagged the major indices. They are up half as much as the S&P 500. They have had brilliant stints, but they didn’t have enough follow through.
This is causing it to ping pong inside a very wide lateral range. It recently bounced off the bottom. And in my scenario, it could bring a swing trade opportunity back to the upper end of that channel. This is a tangible 7% rally. The risk of it failing to start could cause a 5% swing the other way.
I’m concerned with the weekly IWM candle that happened on July 12. It was vicious and marked a hard top. Since then, they spent four weeks repairing the damage and failed to match the upper end. Last week, they almost closed at the very bottom of that candle. This makes it a line in the sand, and if they lose footing they risk falling to $194.
These could be exciting trades, but they will need tight stops. In fact, that would be a good idea for any equity portfolio. It is better be safe than sorry after the fact.
Stocks to Buy: CBOE Volatility Index (VIX)
Source: Charts by TradingView
For the third pick today I could have just as easily chosen the SPDR Dow Jones Industrial Average ETF Trust (NYSEARCA:DIA). Instead I will take the opportunity to remind us all that balance is important. Portfolios that are long only are playing with fire. I know it’s hard to believe it, but red months do happen. We’ve developed a false sense of security. The SPY has had only three monthly red ticks in 15 months. The longer we go without a correction the more likely it will be a crash instead.
Moral lesson aside, the opportunity in the VIX options is real. The third setup is to buy protection through VIX call options. This is a blanket defensive trade to provide shelter in a disaster scenario. Consider it the renting of insurance. Most of us have coverage on our cars, health and houses. We should also carry some on our equity assets.
It’s even in this case because unlike with my car insurance, I can change my mind and sell it. This could result in partial gains or losses. The use of the VIX calls for this week can also double as offense. Investors will build up tension into the Fed event, therefore the VIX should rally into it. Depending on the outcome, there could be a lot more coming out of it.
Sentiment is the only real value variable in play. Investors have been fickle with their opinions and very fast with their actions. The old school Wall Street mantras are mostly dead. The current markets are under the influence of machines, Apes and experts who can’t admit they are missing pieces of the puzzle.
Humility in one’s opinion is a great asset to have these days. Convictions in our trade setups should be medium at best. We don’t know what we don’t know. This macroeconomic condition is unique and we have no history from which the learn lessons.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.