Buying the Dips
June 16, 2017
The market may look dull and uneventful on the surface – trading is pretty flat today – but yesterday was an exciting session that speaks to the economy and the Trump agenda.
I love the action in industrial names, which were led yesterday by companies in the trucking industry. Also looking great are companies that make earth-moving equipment and are building things such as roads and factories.
All the major indices closed in the red, but that’s not the real story. Instead, it’s the fact that the Dow, S&P 500 and NASDAQ finished higher than their opening trade for the session. That’s a major sign that a bottom is developing.
Talk of a bottom may sound surprising, so you can think of it as the index forming a base. Either word may still sound scary, but in fact they should be thought of as the exact opposite. This is the time to take advantage of depressed prices and buy on weakness.
Pulling the trigger after a dip – whether in an individual stock, sector or the broad market – starts with an understanding of the fundamentals. You must determine if the selling has been overdone. If it has, that’s when the technicals come into play, and you have to be able to identify key support points to buy close to. In other words, don’t try to get the exact bottom. Instead, buy with a greater sense that lower prices mean much of the near-term risk has diminished.
This is where many individual investors get it all wrong.
After a stock or the market has made a strong move higher, a lot of investors fear that they’ve missed out and decide not to become a part owner of a company they love simply because they didn’t get the lowest entry point. Then, they miss out on the next buy signal.
Applying this logic to the broad market today, the buy signal isn’t an early rebound but a combination of things, including yesterday’s rally off the opening prints.
There will continue to be rotation into beaten-down names and sectors, which is something to keep in mind depending on your risk tolerance and comfort holding period. However, this rotation brings about opportunities that I expect to take full advantage of in my Smart Investing, Smart Trader and Smart Portfolio investment newsletters.