S&P 500

  • 25 Jun
    “Buy the Dip” is a terrific, time-proven bullish strategy – has its time passed?

    “Buy the Dip” is a terrific, time-proven bullish strategy – has its time passed?

    No matter whether we look at the market and economy with a short or long-term perspective, and no matter what method we usually use to make money in our investments, as investors we are all limited by our inability to see the future. Since we can’t see or know what’s going to happen, we’re left to do our best at making semi-educated guesses using imperfect information. That also means relying on historical data to make forward-looking decisions like what to do with our money. We assume that because a certain method, strategy, or technique worked under certain conditions in the past, it should work again now, or in the future when conditions appear similar.

    There are a lot of investing techniques and strategies out there, and a lot of the most popular ones use a really catchy turn of phrase so you can remember them easily. “The trend is your friend” is one that I learned early in my investing career to help me determine which direction, bullish or bearish, my trades should generally be taking. Another one that has been really popular for the last few years is “buy the dip.” This is one that worked out really well for short-term traders all the way through 2016 and 2017. Here’s what I mean. The chart below is for the SPY, which is an exchange-traded-fund (ETF) that tracks the movement of the &P 500 index.

     

    The green diagonal is a good reference for the market’s long-term trend line during the two-year period shown here. “Buy the dip” means that whenever the stock market experiences a short-term drop – how much really depends on the individual’s preference, and can be a percentage from the last high, a total number, or a visual reference such as the one I’m using here – it’s really an opportunity to buy in and ride the next wave higher. If you’re a short-term trader, using a trend line like the one I’ve drawn would have provided an excellent reference point. I’ve highlighted four difference points over the last two years where a drop to or near to the trend line provided a really good entry point for a bullish trade. While you can’t buy the index, you can trade options on it, or you can work with an ETF like the SPY to go long on the stock or to use call options at a lower cost than index options would carry. If you buy on these kinds of dips, you would hold for as long as the market is showing solid bullish momentum, and then sell when you see the next short-term dip. Taking that approach on any of these four entry points would have generated excellent profits.



    Another approach that really became popular during this period is what you’ve probably heard called “passive investing.” It also relies on the same kind of signals for an entry, but then suggests that since the market is going to experience the same kind of short-term ebbs and flows, all you really need to do is find the next entry point and then ride the next several waves higher. If you were fortunate enough to get in on the dip in July 2016, around $201 and then followed the passive investing mindset, by the end of 2017 you would have been looking at almost $70 per share in profit from the SPY. That’s a two-year return of almost 34%! It’s really no wonder that so many people gravitated to passive investing using ETFs or stock index mutual funds like the Vanguard 500 Index Fund during this time; it really seemed like the market was a no-brainer, can’t-miss kind of investment.

    The problem that underlies methods like passive investing, or even the normal “buy the dip” mentality is that most investors lose the discipline to pay attention to signals that the market is changing. It usually means they just assume the upward run will never end, and the latest drop is just another “dip” in the latest series of dips before it picks up again. That puts the average investor at big risk when the broad market experiences the kind of rare, “sea change” shifts that only come along once or twice a decade. The last economic cycle that ended in a recession in 2008 is a perfect example.

    As with the last chart, I’m using the green diagonal for the market’s long-term trend from late 2002 through the beginning of 2008. The blue circles highlight terrific “buy the dip” points that had a lot of people thinking the market was just going to keep going up forever. The red circle highlights a dip in the latter part of 2007 that by all appearances looked like just another dip in the longer trend, but really proved to be just the last desperate gasp of momentum the market had left. At the beginning of 2008, the SPY dropped below its long-term trend line and found a temporary bottom around $132 per share. That’s about a 9% drop from the entry around $145 that most “buy the dip” traders were taking in late 2007, and should have been a clear signal to exit the trade and cut your losses. If you didn’t recognize that signal, your loss could have been much, much bigger since the market didn’t find a bottom until early 2009, when the SPY was around $67 per share. That’s a drop of nearly 54% if you rode it all the way to bottom, and didn’t get reclaimed until late 2012. That’s the kind of loss, and extended, protracted recovery that most traders that love to “buy the dip” when the times are good can’t handle.



    One of the big keys to being successful with any investing strategy, no matter whether it works on a short-term basis or with a long-term perspective is really less about when you buy a stock than it is about when you sell. Smart “buy the dip” investors will usually sell when they see the market staging short-term weakness that could become a longer-term downward slide. That locks in their profits and opens up the opportunity to buy in again on that next dip, hopefully at a low point. Acting quickly on taking profits also would have the advantage of getting you out of the market before a “last gasp” rally turns into a market reversal.

    The danger remains, however that could buy a dip expecting just another upward thrust, but ultimately see the market reverse right after you got in. That’s why it’s also important to pay attention to trends and recognize that when the market drops below major, long-term trend lines, the risk of a “sea change” reversal is incrementally higher than normal. If you bought the last dip in late 2007, for example, it would have been much better to recognize the drop below $140 for what it was. Even if you didn’t get out until the market found a temporary support point around $132, an 8% loss on that trade would have been far easier to deal with than riding the SPY all the way down to $67 hoping for an eventual turnaround.



    Okay, now let’s take all of that and talk about what the market is doing now. As of this writing, the market is down about 3% from its last high about two weeks ago. Is that just another “dip” that investors should treat as a buying opportunity, or maybe something more serious. Let’s take a look.

    The green diagonal line is, once again our proxy for the market’s long-term trend, with the dotted blue line acting as visual reference for its short-term trend. “Buying the dip” would have been really profitable if you bought in April, and dips in the early part of May, and then again late that month would have also have yielded some decent short-term gains. Notice that the index has dropped below that short-term trend line as of today. If it turns back to the upside, that could be another good short-term signal, but it also should be taken as a warning sign that it’s time to be a little bit cautious. Are we looking for a major, “sea change” kind of reversal? Not yet; but it’s also true that the index is just a short distance – less than 5%, in fact – away from the long-term trend line. A drop below $260 per share in the SPY is exactly the kind of signal that “buying the dip” is going to put you at an increasing risk of being on the wrong side of the market, at exactly the wrong time.

    What if the market proves the naysayers wrong yet again? The problem with the long-term trend right now is that the market’s activity since late January has forced that trend to flatten out, meaning that it is losing momentum and strength. Short-term traders who recognize this reality won’t necessarily stop trading, but they will usually act even more quickly than normal to close out winning trades and lock in profits than they might be to let their winners run. The fact is that until the market moves past its all-time high, reached in late January when the SPY peaked at almost $287 per share, it’s hard to make any kind of substantive case for any kind of continued bullish rally that would extend this bull market past its current nine-year run and possibly into the next decade.


  • 07 May
    What You Can Learn From Berkshire’s Annual Shareholder Meeting

    What You Can Learn From Berkshire’s Annual Shareholder Meeting

    This past Saturday, the Woodstock for capitalists was on as Warren Buffett and Charlie Munger held their annual shareholder conference.

    If you want to succeed in investing and reach your financial goals, this conference and the insights from it are all you need to listen to in order to learn about investing, what’s going on, and what to do about it.

    In today’s article, I’ll summarize what the key points to take out are and also save you the 6-hour watch.



    More →

  • 03 May
    Buffett Thinks You Can Turn $400 Into $400,000, But Here’s The Reality

    Buffett Thinks You Can Turn $400 Into $400,000, But Here’s The Reality

    Buffett recently gave an interview where he discussed how if he would have invested the first $114.75 he made in 1942 in the S&P 500 and reinvested the dividends, he would now have $400,000.

    That’s a nice way to sell the stock market to people, but I really disagree with Buffett and with what he’s selling. Today, I’ll discuss reality.




    More →

  • 25 Apr
    Here’s Why You Should Worry About What Happened In The Market Yesterday

    Here’s Why You Should Worry About What Happened In The Market Yesterday

    The thing with the stock market is that it gives you signals way ahead of time, but nobody wants to listen. The things I’ve been blabbering about over the past two years are the following:

    1. Higher interest rates will come just as the FED told us they would.
    2. Higher interest rates will squeeze valuations.
    3. Higher interest rates will slow down economic growth.
    4. Higher interest rates will slow down earnings growth.

    So, let’s start by discussing these.



    The 10-Year Treasury Passes 3%

    When the 10-year Treasury was below 3%, nobody seemed to care except a few crazy analysts like this scribe. However, when it crossed 3%, the market suddenly looked at what had been going on for nearly the last two years. More →

  • 13 Mar
    This Might Be The Biggest Risk To The Stock Market

    This Might Be The Biggest Risk To The Stock Market

    • ETFs have grown extremely fast in the last 10 years.
    • This amplifies the risks of the stock market because, since when does the majority know what’s best?
    • There is one small example of what happens when things stop growing.



    Introduction

    I’ll close my series on the risks to the stock market by discussing a risk that few see where the prevailing wisdom in one of investing through passively managed mutual funds and ETFs. This is creating a big risk, even if it doesn’t look like that now. Let me elaborate on that. More →

  • 07 Mar
    Risks Are Piling Up – That’s A Huge Red Flag For Stocks

    Risks Are Piling Up – That’s A Huge Red Flag For Stocks

    Last week I discussed how the risk are piling up on the debt side of the equation. However, those aren’t the only risks piling up which isn’t uncommon for humans. When we stray, we usually stray in a big way.

    So, on top of the debt, there are other huge risks and today the discussion will be about valuations:

    • Debt is being used recklessly.
    • Valuations don’t matter as growth is the key and profitability will come.
    • Book values are so old fashioned.
    • Stocks can only go up and corrections and bear markets don’t last long.
    • Real estate can only go up.
    • If you invest in index funds, you will do well.



    Now, I’ll discuss a lot of macro, and even some politics on Monday, but such factors might be insignificant or very significant depending on market valuations. High market valuations make stocks fragile, while low valuations make them more robust as once stocks are low, there is little room to go lower. However, when stocks are high, a lot of bad things can happen. The sad thing is that we have been there and we are doing the same mistakes all over again.  More →

  • 20 Dec
    This Is How You Should Look At Risk

    This Is How You Should Look At Risk

    • Something that has just increased in price isn’t considered risky, but something that decreases is.
    • Further, something that isn’t volatile is also not considered risky.
    • I’ll discuss perhaps the most important currently overlooked factor in investing, risk.



    Introduction

    A recent Wall Stree Journal article discussed how 2017 was a bad year for Chinese IPOs.

    On aggregate, China’s 2017 IPOs created a negative 5.7% return and more than half of them produced negative returns of over 10% where 10 of the 16 stocks still trade below IPO prices. More →

    By Sven Carlin Investiv Daily Risk S&P 500
  • 11 Dec
    Don’t Underestimate Market Sentiment

    Don’t Underestimate Market Sentiment

    • Sentiment is perhaps the strongest market driver. We’ll discuss the current situation.
    • It certainly doesn’t pay to be a fundamental market arbitrageur.
    • Should you follow the trend or is there a way to be smart about it?



    Introduction

    I’ve always preferred fundamental analysis, value investing, and looking for a margin of safety. That is still my main focus when analyzing and investing in a company, but I’ve learned that there is something no fundamental investor can disregard, market sentiment. More →

  • 06 Nov
    This Is Why You Need To Be Invested In Emerging Markets

    This Is Why You Need To Be Invested In Emerging Markets

    • In investing, having a strong tailwind is perhaps more important than picking the right stocks.
    • Finding good stocks in emerging markets isn’t that difficult, and plenty of them trade on U.S. exchanges.
    • It all boils down to fundamentals. Rebalance accordingly between developed and emerging markets.



    Introduction

    I’ve talked a lot about investing in emerging markets, but I’ve never assessed emerging markets from an holistic perspective.

    Today, you’ll read everything you need to know about investing in emerging markets. It’s extremely important to know why to invest in emerging markets, and then to understand the best way how to do so because not every investment in emerging markets is going to do well. More →

  • 18 Oct
    On The 30th Anniversary Of 1987’s Black Monday, Today’s Market Looks Eerily Similar. Should You Prepare For A Crash?

    On The 30th Anniversary Of 1987’s Black Monday, Today’s Market Looks Eerily Similar. Should You Prepare For A Crash?

    • The data indicates that the likelihood of a crash similar to October 1987 is the same today as it was then.
    • This doesn’t mean the stock market will crash tomorrow.
    • It only means that you should know yourself extremely well and relate your investments to your risk reward appetite. Only this can prevent you from the biggest mistake investors usually make, i.e. sell at the bottom of a bear market in total panic and capitulation.



    Introduction

    On Monday October 19, 1987, the stock market crashed a whopping 22.6% in one day. Is it possible that the same could happen tomorrow? Well, let’s compare the current market and to the one back then. More →

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