Value Traps or Opportunities: Whether to "Buy the Dip"

By
A A A
Share |

(Written by Alexander Crawford, list compiled by Eben Esterhuizen. Short data sourced from Yahoo! Finance)

The popular trading strategy of “buying on the dip” was recently discussed in a MarketWatch interview with Wall Street Journal columnist Jason Zweig. In it he makes some interesting points to keep in mind for anyone considering the strategy of buying consistently when the market turns south:

• In an increasing stock market, buying the dips means you’re paying more and more even though it feels like you’re getting bargains.


• It’s difficult to measure the success of “buying the dip” because everyone has a different definition of the strategy (whether it’s buying after a 1%, 2%, or 5% correction).


• Dips tend to cluster at market bottoms, where buying can take you to the ground.

 

Zweig then said, "They also cluster near market peaks. In the second half of 2007, there were 9 days when the S&P went down more than 2%, very close to its all-time record high. So, if you bought then, you bought 9 times over 1,400, and the S&P today is barely at 1,100."

It seems that Zweig follows the idea that it’s better to keep a longer-distance view of trading than short-term market dips.

Here’s the complete interview:

So, are there any stocks that are worth buying on the dip?

For ideas, we collected data on about 200 stocks that are stuck in a strong downturn, i.e. trading below the 20-day, 50-day and 200-day moving averages.

We then collected data on short trends, and identified a list of downtrend stocks that have seen a significant decrease in shares shorted over the last month.

In other words, short sellers are cutting back on their bearish bets against these stocks.

Short sellers seem to think the upside potential of these stocks outweighs the downside potential--do you agree? Are these stocks good to buy on the dip?

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

List sorted by the distance from the SMA200.

1. Alpha Natural Resources, Inc. (ANR): Engages in the production, processing, and sale of coal in the United States. The stock is trading 32.88% below the SMA20, 43.36% below the SMA50, and 61.62% below the SMA200. Shares shorted have decreased from 12.98M to 9.93M over the last month, a decrease which represents about 1.36% of the company's float of 225.08M shares.

2. Walter Energy, Inc. (WLT): Produces and exports metallurgical coal for the steel industry primarily in the United States. The stock is trading 22.82% below the SMA20, 31.69% below the SMA50, and 47.74% below the SMA200. Shares shorted have decreased from 3.04M to 2.10M over the last month, a decrease which represents about 1.51% of the company's float of 62.09M shares.

3. OmniVision Technologies Inc. (OVTI): Designs, develops, and markets semiconductor image-sensor devices. The stock is trading 13.73% below the SMA20, 34.82% below the SMA50, and 49.12% below the SMA200. Shares shorted have decreased from 7.54M to 6.97M over the last month, a decrease which represents about 1.02% of the company's float of 55.75M shares.

4. RealD Inc. (RLD): RealD Inc. licenses stereoscopic three-dimensional or 3D technologies internationally. The stock is trading 22.01% below the SMA20, 30.12% below the SMA50, and 58.09% below the SMA200. Shares shorted have decreased from 8.70M to 8.04M over the last month, a decrease which represents about 1.62% of the company's float of 40.74M shares.

5. LDK Solar Co., Ltd. (LDK): Engages in the design, development, manufacture, and marketing of photovoltaic (PV) products; and development of power plant projects. The stock is trading 35.48% below the SMA20, 47.15% below the SMA50, and 67.83% below the SMA200. Shares shorted have decreased from 37.28M to 29.82M over the last month, a decrease which represents about 13.43% of the company's float of 55.54M shares.

6. ExamWorks Group, Inc. (EXAM): Provides independent medical examinations (IME), peer and bill reviews, and related services to property and casualty insurance carriers, law firms, third-party claim administrators, government agencies, and state funds in the United States, Canada, and the United Kingdom. The stock is trading 13.89% below the SMA20, 31.05% below the SMA50, and 49.87% below the SMA200. Shares shorted have decreased from 3.56M to 3.23M over the last month, a decrease which represents about 1.29% of the company's float of 25.52M shares.

7. American Superconductor Corporation (AMSC): Provides wind turbine designs and electrical control systems primarily in North America, Europe, and the Asia-Pacific. The stock is trading 24.38% below the SMA20, 31.91% below the SMA50, and 72.86% below the SMA200. Shares shorted have decreased from 9.11M to 8.66M over the last month, a decrease which represents about 1.15% of the company's float of 39.11M shares.

8. Sky-mobi Limited (MOBI): Engages in the operation of a mobile application store in the People's Republic of China. The stock is trading 34.29% below the SMA20, 44.45% below the SMA50, and 61.54% below the SMA200. Shares shorted have decreased from 1.34M to 1.26M over the last month, a decrease which represents about 1.1% of the company's float of 7.25M shares.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


Kapitall

Kapitall

More from Kapitall:

Related Videos

Stocks

Referenced

Most Active by Volume

89,970,926
  • $16.15 ▲ 0.12%
77,131,582
  • $58.94 ▼ 1.31%
67,336,935
  • $26.56 ▲ 1.68%
48,814,124
  • $86.20 ▲ 0.02%
47,526,126
  • $23.21 ▲ 0.78%
44,660,424
  • $23.91 ▲ 6.36%
38,799,699
  • $4.289 ▲ 4.36%
36,199,890
  • $40.01 ▼ 0.97%
As of 4/17/2014, 04:07 PM