S&P 500 Breaks 200MA, A Buying Opportunity?

The U.S. stock market has struggled recently, with both the Nasdaq and S&P 500 indices entering a correction phase. The once high-flying Magnificent 7 stocks have all declined this year, underperforming the broader market and earning the unfortunate nickname Lagnificent 7. Tesla, the worst performer of the group, has seen its stock price cut in half.

If the S&P 500 continues its decline, it risks breaking below its 200-day moving average—a critical technical indicator it is currently hovering just above.  A decisive break below this level could trigger additional selling pressure from technical traders and algorithmic trading models, potentially accelerating the downturn.

However, as Petyr "Littlefinger" Baelish from Game of Thrones famously said: "Chaos is a ladder." That sentiment aligns with the view of Cameron Dawson, Chief Investment Officer at NewEdge Wealth. In a recent presentation alongside colleagues Brian Nick and Jay Peters, Dawson emphasized that "volatility creates opportunity."

Investors shouldn't panic. Historical data shows that buying the S&P 500 after it falls below the 200-day moving average often results in attractive long-term returns. Since the 2008 global financial crisis, the market has breached this key level 15 times. Investors who bought on the day of the break saw an average 17% return over the following year. Notably, only one out of these 15 instances resulted in a negative one-year return. Looking at a three-year horizon, the average return jumped to 58%, or roughly 16% annually.Dawson and his team suggest that in the current environment, investors should look beyond the S&P 500 and the struggling Mag 7.  Instead, they recommend directing new capital toward high-quality small and mid-cap stocks. Additionally, they advise ensuring adequate bond exposure and using options strategies to take advantage of market volatility while maintaining portfolio stability. Lastly, investors should steer clear of assets primarily driven by speculation, as those tend to be the most vulnerable in turbulent markets.