Credit: Shutterstock photoI have said it before and I am sure I'll say it again: I hate the advice to “buy the dips.” To most individual investors that phrase is basically meaningless. What constitutes a dip? How far should you let it go before you step in? Should you deploy all of your cash or just a portion so that you can wait for another, more meaningful dip? Now that I have that off my chest, allow me to offer some advice in the current directionless market: Buy the dips.
Maybe I should make it clear what I mean by that before explaining why it is a decent strategy right now. We are in a market that has been basically moving sideways for months, as demonstrated by the 3 month chart for the S&P 500.
As you can see, though, that movement has been contained in a clearly defined range that approximately equates to 2050 to 2125. Deploying a small portion of available cash on any dip below 2075 would have been a winning strategy for months now, and should continue to be so. Of course, if you are buying stocks on the dips you mist believe that when we break out of the range it will be to the upside. There are sound reasons to believe that will be the case.
The biggest thing driving the bouncing around is not real news. It is speculation about what effect each piece of news will possibly have on something that hasn’t taken place yet. If that seems somewhat vague, that's because it is. At some point in the not too distant future, the Fed will raise rates; that much is known. We even have a pretty good handle now on the magnitude of the coming hike. The Fed has been at pains to point out that any rise in rates will be “gradual” or “incremental,” which suggests that 25 basis points initially is pretty much a certainty.
So if we know a rate rise is coming, and we know by how much, the only variable left is when it happens. Consensus on that seems to have been September for a long time, while some are now saying December. At the risk of committing pundit heresy, may I suggest one thing? It doesn’t matter which of those guesses is correct.
For individual investors what matters is that, after months and months of speculation, the market has absorbed the idea of a rate hike. I am not saying that such an event wouldn’t cause a reaction, just simply that said reaction would be extremely limited. As we approach the September Fed meeting, the speculation will reach fever pitch, with every uttering (or lack of one) being analyzed for clues. If a decision does come next month it could well be something of an anti-climax and the market reaction would be relatively muted and almost certainly short lived.
That could be the big dip, so to speak, and any cash left could be used to buy at a discount then, but, should the delay that some are now expecting come, there would be a significant move to the upside. Let’s not forget that the reasons for a rate rise are all to do with a stronger economy, something further confirmed by this morning’s jobs report. 215,000 new jobs is not exactly breakneck pace, and the number was in line with expectations, but it continues a strong run of improvement in the job market.
We should never forget the absurdity of a negative reaction to good economic news, and dips that result from that are particularly appealing. The negative reaction today to the improving jobs market constitutes one of those dips, so even though the resultant move down may not take the S&P below the suggested 2075 level it is still a good time to pick up some cheap equities.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
