The stock market struggled last week to find footing. The macroeconomic conditions are not that bad, but serious headlines are draping a dark cloud over Wall Street. Investors lack the confidence to risk funds into stocks. However, today we argue that there could be a rally after the Federal Reserve event mid-week. If I’m correct, then there should be ETF stocks to buy on the dip.
Fed chair Jerome Powell promised ending the taper this week, and perhaps raising rates. Consensus is that it should be a quarter-point, but the more important note would be about the next one. Investors want to know the frequency of subsequent actions. I’m optimistic on that, more so than the prevailing consensus.
So far, the sellers are in control because they have unusual tailwinds helping them. At the forefront is the situation in the Ukraine. Even though politicians are sporadically saying the right things, there hasn’t been follow through. The matter is escalating and getting more complicated. Therefore, the situation is volatile and it could take a turn for the worse quickly.
As a result, investors must keep one foot out the door and I don’t blame them. My way of dealing with this is to make most of my current trades tactical. I rely more so on technical data than fundamental. Regardless of the type of trading, we should all take only partial positions just in case.
While doing stock homework, I have come across dozens of excellent candidates for investments. But for the lack of overall risk appetite, I can’t rely too heavily on that short term. The fundamental homework is hostage to headlines while these risks persist. This week there could be relief at least on one front, once the Wednesday Fed event elapses. Investors may have one thing less to fret, and I stress “may” because it is speculation.
My thesis is that the Fed will not be as aggressive as consensus is expecting them to be. If I am right then there should be a relief rally out of Wednesday. It is also quadruple witching week, so I should be ready for the unusual to happen. Once Wall Street gets familiar with the Fed’s tightening pace they will only need to focus on the Ukraine. The headline is already weeks old, and stocks have a way to live with bad news.
Here are my three ETF stocks to buy into the mid-week dip:
ETF Stocks to Buy: SPDR S&P 500 ETF (SPY)
Most often when the experts cite “the market” they are referring to the S&P 500. For that, the SPY stock is a great way to represent and trade the market. It is liquid and it has options contracts that expire three times per week. This leaves investors unlimited opportunities to trade it for profit, or use it to hedge their portfolios. On Friday, I actively shorted it by buying SPY puts at the open. The trade yielded a hefty win which I already booked. This short term bet doesn’t represent my outlook for the stock this year. In fact, quite the opposite, my message today is more bullish than that.
My thesis is that there is a good chance that SPY can rally later this week. Therefore, I am looking for SPY dips to buy. This, of course, assumes no new disastrous geopolitical development from Russia. The prevailing consensus now is that the Fed is no longer our friend. I take the opposite side of that coin, as I assume that they still want to care for the market. They have invested themselves into this situation by spending trillions since 2020. The last thing they should do is break the momentum completely.
Besides, the struggle in the Ukraine gives them a bit of cover. Mr. Powell can always blame concerns over the conflict to hold back from raising rates too quickly. We all agree that inflation is high, but so far it hasn’t slowed spending down. Furthermore, the Russia-Ukraine situation is extremely volatile and far more dangerous. I would much rather live with a bit of inflation than stress the economy.
The SPY stock $370 level has been in contention since two Decembers ago. It served as a base for a 29% rally to the 2021 highs. Retesting support for footing can be part of normal price action. There should be strong support near $398 per share, which was the breakout line last March. If we get a dip this week, traders should check into getting long on weakness. Conversely and on rallies, there should be sellers near $432 per share.
Invesco QQQ Trust (QQQ) (QQQ)
The QQQ stock is similar to the SPY but with a slight variation. The differences are getting less obvious with time, so they move almost in perfect sync. The reason for this is that almost all stocks are tech stocks as computers and AI creep into everything. For example, Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA) are not officially tech companies, but in reality they are at the forefront of it. Besides, many of them are in both indices, which adds to the similarity in the price actions.
Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) are the top two stocks in both. But in here they comprise 22% of the total ETF. This is the nuance difference between this and SPY. Also the QQQ is a bit closer to potential peril than the SPY. But I bet that if it triggers the bearish pattern lower, they will both fall on the same day. The downside target from this possibility could extend another 10% from there.
The $300 level has been in contention since December of 2020. The QQQ broke out from there and used it as footing for a 35% to the highs. It’s only natural to retest it and find support there one more time.
On a dip like this, it might make sense to try an catch the falling knife for a rebound trade. This is different than going all in with a full investment, because there are too many issues at hand. The relief rally in the QQQ could face resistance going into $350 per share. If the support fails, traders need to accept that a sharper correction could unfold.
In reality, both the SPY and QQQ scenarios are nearly identical: Buy the dip for a tactical bounce maybe as early as this week.
ETF Stocks to Buy: SPDR S&P Biotech ETF (XBI)
Unlike the prior two tickers, the XBI stock has a bit more specific scope, as it represents the biotech sector. Each company makes up a small portion, so there isn’t one that can influence the whole. Ocugen (NASDAQ:OCGN) and MannKind (NASDAQ:MNKD) are two components each with under 1% share. The whole top 10 makes up only 9% of the XBI stock. This diffuses the single stock headline risk, so it is calmer than choosing individual winners and loser.
The biotech sector has strong fundamentals, but it has extreme ups and downs. They are notorious for surprise headline swings at any moment. Therefore, I can always assume that there is upside potential if the macro conditions and the stock technicals allow it.
And since now it has fallen into support, that opportunity is real. The levels they are hitting date back to the pandemic bottom. While it’s not quite at the trough, it’s close enough to warrant investigating. If the markets stabilize this week, and if Powell’s words are docile, the XBI bulls can step into it.
Again this is a tactical setup that requires relatively fast hands. But on rare occasions, trades can make for decent investment ideas too. The XBI now also makes for a decent swing trade idea for the next few months. The trick is to only take starter positions, thereby leaving room for error to add later. Averaging into a full position makes more sense than averaging down and creating bigger risk.
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.