When is the sell-off officially a buying opportunity?

by Wayne Ferbert on August 27th, 2013

Quite a sell-off we have in today’s market. The WSJ is blaming it on two things: potential military action against Syria and news that the debt ceiling will be reached in October – AGAIN.
 
The news folks like to pinpoint a reason for a sell-off – but often the news is just the excuse to act. The people selling wanted to sell because of lots of reasons that have built up over time. 
 
The S&P 500 reached a high of $1,709 in the first week of August. Now we are $70 lower. But for perspective, the markets have gotten so high that a $70 move is actually slightly less than a 4% move down.
 
When markets correct, it often looks larger than 4%. IN fact, 4% is not even technically a ‘correction’. So, when it comes to being a buying opportunity, I would want to see a little more move down.
 
The S&P500 has just now dipped below its 50 day moving average. Twice in 2012, the S&P500 dipped below its 50 day moving average and continued down at least another 4% before moving back up. But the market has also head-faked below its 50 day moving average before. That happened once in 2012 also.
 
In the end, I would bet on a further dip giving you a buying opportunity here. Here is how we are playing the dip:
 
1.     We are selling puts in to the spike in volatility. If the dip occurs, we are happy to be buyers at new lower prices.
2.     We are net bullish – but hedged.
 


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