Should you buy the dip?

To buy or not to buy the dip, that is the question?Take any major index and you can see that prices rise from low to high. Almost all stock indexes go up over time. The S&P500, the FTSE100, the Nikkei, the Nasdaq. The trick is to be in the stock long enough. So, take a look at the S&P500 and you can see that the index moved up from 400 in the 90’s all the way up to 4800 in 2022. 

The only way is up over time?

So, buy the dip is the right strategy? Yes and no. It is a great strategy to buy into the market by scaling in over time. This helps smooth out some of the dips and more extreme moves. 

However, let’s see why it isn’t necessarily the right strategy. If you had bought one of the dips in the dot come crisis of 2021 let’s play that out. Say you bought the October 2001 dip you would have had a few years of drawdown to sit through before prices returned past the 2008-2009 global financial crisis, 

Dip buyers can still experience significant drawdown

Can you see the issue? It can be very hard to know where the ‘bottom’ of the dip is in real time. In hindsight the bottom is easy to find – it’s just so obvious. In real time it is much harder. 

Worrying signs from US retailers Walmart & Target

Walmart and Target earnings both worried investors this week. Demand held up, but the worry is around margin compression. Fuel prices are up, wages are up, sales are up, but profit is down. This means companies margins are being hit. When interest rates rise further then there is going to be a further hit to companies profits. The Fed is adamant that it is going to hike to contain surging inflation. 

Do you see the problem here? The bottom may not be in. 

One handy rule of thumb is that the US tends to move into a recession when the S&P500 is down more than around 23%. That would mean a dip around 3600 or 3700 might be the level the fed reverses its aggressive rate hiking policy. Take a look here: 

A correction above 24% usually results in a US recession

Is this the place to buy a medium term dip?

So, this could be a decent area to attempt a longer term dip buy, just remember that no-one KNOWS for sure where the dip will be. This is in part because no analysis can ever predict the future, no matter how clever or conscientious the analyst. However, at least there is a logic to the idea.

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