All METARs are aware that the sudden air pocket in the SPX a week ago was a pretty shocking continuation of a decline in stocks and Treasury yields that began in mid-July. Although the markets stabilized last week the question is whether the dip is temporary or a presage of further drops to come.
Market Turmoil Revives Age-Old Question: Should You Buy the Dip?
Many have been rewarded for buying into declines in recent years
By
Hannah Miao and
Karen Langley, The Wall Street Journal, Aug. 10, 2024
…
The recent market meltdown and subsequent ricochets are testing an investing tactic that has carried U.S. stocks higher time and again in the past 15 years: buying the dip. In the years after the 2008-09 financial crisis, investors were rewarded for trying it. The longest bull market in history turned it into a rallying cry from the boardroom to the barbershop. The internet coined a shorthand term: BTD…
But just because a Wall Street strategy has worked for a long time doesn’t mean it will forever. After the tech bubble burst, the S&P 500 took seven years to regain the heights of 2000. The Nasdaq Composite needed 15 years. And the pandemic era has brought surprising changes to inflation and the economy — the kind that can shift market dynamics for years to come…
Buying the dip hasn’t always reaped immediate benefits. In 2022, down days in the market were often followed by more declines, walloping investors again. The S&P 500 dropped 19%, its worst year since 2008… [end quote]
The Control Panel shows that the sudden shock was followed by a small relief rally. It’s too soon to say whether this is signal or noise.
The Fear & Greed Index is in Extreme Fear. The Treasury yield curve rose a little. Financial stress is still very low.
The CAPE is still at a bubble high. Past bubbles over centuries have always seemed normal (even exciting) to investors (speculators) until they pop.
The two major factors affecting the stock and bond markets are the economy and the Federal Reserve.
The options market is sure that the Fed will cut the fed funds rate during the September FOMC meeting. They are split 50-50 as to whether the cut will be 25 or 50 basis points.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 was 2.9 percent on August 8. Unemployment initial claims are gradually trending up but still very low.
Anyone remember the “mungofitch indicator” of the ratio of the price of copper to gold? Copper has been falling and gold rising so the ratio has been falling strongly. Is it an indication that the real economy (of using copper for construction) is weakening, as mungofitch hypothesized? Or is it an indication that lower demand from the weakening Chinese construction market is affecting the price of copper and not necessarily significant for the U.S.?
Like all investment decisions, the question of whether to buy the dip is personal. The increase in SPX has been driven by a few stocks. The majority have not participated in the bubble but could be dragged down if it should pop. One approach to buying the dip could be placing limit orders close to the minimum price of a stock and waiting patiently until the next dip pulls the fish into the net.
The METAR for next week is cloudy. It’s too early to say whether the markets have stabilized.
Wendy