Friday, March 7, 2014

Buying the Dip revisited

A few posts ago I got pretty sarcastic regarding people who are stepping up to "buy the dips". As the market strongly rebounded it would appear to be a "bad call".

It was not a call on the market. It was an expression of a trading principle.
I do not think it is wise to buy a dip just because it is a dip. If there is a trend in place, and you do not have a position, perhaps buy SOME on a dip. Buy MORE as the security goes to new highs. But it all depends on how it does go to new highs, or whether the dip is on low volume. What also matters is the broader market. Where is the broader market in relation to time. Has the broader market just turned a major corner? Or is the broader market at 5 year highs?
 It matters. Particularly if you have a long time horizon, as most of the "money managers" on the Tellyvision profess to have. If you have a  long term time horizon and you don't own something that has been on a tear for years you have a problem. Not that you HAVE TO HAVE that stock. Do you?

The problem with buying on the dips is psychological. If you buy something that has went down in price you are guessing at a bottom. Assuming that you desire the price to go up. If you are O'kay with being wrong and have a plan to sell the stock at a certain small loss then buying the dip may be smart. But it is hard to pick tops and bottoms. And if you waited to buy something that has been going up for some time you probably feel you don't want to miss the party so you will have a problem admitting error.
 And most fund managers are fundamental based managers. They depend on their research to pick the good companies from the bad. Buying on a dip is a purely technical exercise.

And the quality of a dip must be considered. The recent dips in the stock markets have the urgency that is a precursor of a turn in the markets. They are the raiding parties of the bears, to use an expression from Mr. Livermore. And are thus warnings.

I am not impressed by the general market action today. We will have to revisit the prospect of an interest rate rise at the same time China is perhaps in the beginnings of an debt crisis. We saw what the thought of higher interest rates meant to emerging markets and we know they cannot help our own consumers buy Chinese.
And there is Europe, and the prospect of higher energy and perhaps war.
This is not the dip to buy if you have a long term perspective.
IN my Opinion.

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