Buy-The-Dip Is Alive And Well
How do you buy in a rising market?
No one likes to pay new highs for an investment. The pressure is on the purchaser to justify the decision. The best one can hope for is the momentum is so strong that not only is the breakout held but it is extended in a powerful manner.
The alternative is a consolidation where the investor will be underwater until a breakout is sustained. That creates negative sentiment even when the price is still within striking distance of the all-time highs.
It is much better, both financially and psychologically, to buy the dip. In a rising market brief periods of weakness don’t last. That is one of the clearest signals we can hope for that a large imbalance between supply and demand favours buyers.
The eagerness of new buyers to come in and snap up stocks, at even a modest discount to the all-time peak, is the hallmark of a bull market. Moreover, buying the dip is the best strategy in a powerful trend because it will continue working until the very end of the move.
Since no one can know with absolute confidence where the terminal point in a trend is, the benefit of being willing to buy the dip is compounded.
There is also a self-reinforcing element to buying the dip. The more times a strategy works, the more comfortable an investor is in following it. That builds confidence and reduces anxiety which prompts investors to increase the size of their positions. In turn that supports the continued advance in prices.
In a trend that lasts for several years there will be somewhat larger pullbacks that challenge the resolve of investors. When buying the big dip is fruitful, it creates even greater resolve to persist in allocating additional funds to the trend.
The downside is that in a bear market buying the dip is the worst strategy to follow. It is exceptionally difficult from a psychological perspective to change from buying the dip on every pullback to selling every rally. That’s how successful investors in a bull trend give it all back during a bear market.
As we look at the impressive consistency of the Nasdaq-100’s trend over the last decade, there have been three distinct pieces of evidence to suggest dip buying has been the dominant investment trend.
Inside the current short-term range, the Index has bounced repeatedly from the 20750-20800 level.
During the primary trending phases, there are several occasions when the Index returns to test the region of the 200-day moving average. Arguably, the current range is achieving that feat simply by going sideways. That is creating fuel for the automatic buy orders that are programmed to kick as the moving average is approached.
Every few years, the Index pulls back enough to test the region of the 1000-day moving average. This is the big touchstone in a long-term trend. These kinds of reversion offer attractive multi-year entry points in any secular move.
For an index that has risen from 1,000 to 21,750 since 2008, a significant drawdown will be required to break the uptrend. A sustained move below 1000-day moving average would be conclusive proof the trend is over. In the meantime, I suspect a large number of leveraged bets will have stops near the psychological 20,000 level.
These are the kinds of topics we discuss at The Chart Seminar. It’s the longest running course on a behavioural approach to markets in the world; now in its 56th consecutive year. I’ve been approached by several subscribers about dates and venues for 2025. Please reach out to sarah@fullertreacymoney.com with your suggestions for when and where you would like to attend.
We normally hold one in London every year. I’ve been asked about doing one in North America. I am willing to consider any location if there is demand. I also have access to the Nevada Trust board room if anyone would like to visit Las Vegas for a seminar during the Grand Prix in November.