Trends

  • 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.


  • 17 Apr
    The Flattening Yield Curve Means Trouble Ahead. Here’s What You Need To Know.

    The Flattening Yield Curve Means Trouble Ahead. Here’s What You Need To Know.

    • What is the yield curve?
    • The yield curve is flattening and if it inverts, there will be a recession.
    • What you can do.



    Introduction

    In this article, I’m going to explain what the yield curve is, what a flattening or steepening yield curve means, how the yield curve impacts the economy, and see whether the current yield curve indicates that we are close to a recession in 2018. More →

  • 30 Mar
    Read This Before Investing In Exxon

    Read This Before Investing In Exxon

    • I’ll discuss the current earnings and XOM’s long term forecast. I’ll also discuss some factors that might jeopardize the forecast.
    • I’ll talk about why XOM is falling.
    • And I’ll conclude with a risk reward view on XOM.



    Introduction

    Exxon Mobil (NYSE: XOM) is down 11% year to date and I’ve seen many headlines discussing how the stock is extremely cheap and a bargain.

    I’ll first discuss why the stock is dropping, analyze the company, and then give you my view on the risk and reward of investing in XOM.  More →

  • 21 Mar
    This Industry Is About To Be Disrupted In A HUGE Way

    This Industry Is About To Be Disrupted In A HUGE Way

    • There are three trends of huge importance in the car industry: electric drive, autonomous drive, and transport as a service.
    • It’s important how this could impact margins and sales.
    • A trend where everything becomes cheaper isn’t a trend you want to be invested in with a few exceptions.



    Introduction

    This past weekend, I discussed Ford from a cyclical sector perspective but there is so much going on in the automotive sector making it a much different environment from what it has been in the last 100 years.

    Today, we’ll discuss what’s changing in the automotive industry and how that will impact producers over the next 10 years. The secular trends I discuss in this video are the shift from internal combustion engines to electric-powered, the shift from active-drive to autonomous, and the shift from user-owned to drive-for-hire services, think of Uber, Lyft, Didi, etc. More →

  • 11 Apr
    The FED Is Feeding Journalists Stability While Also Confessing Its Cluelessness

    The FED Is Feeding Journalists Stability While Also Confessing Its Cluelessness

    • Reading the FED’s meeting minutes is necessary to grasp those trends that will shape investment returns but are not explicit or immediate.
    • The FED has started discussing running down its balance sheet if the economy stays on track.
    • However, the FED also just told us that they have no clue what will happen this year or in the next few years. Read this article and the FED’s minutes if you don’t believe it.

    Introduction

    Last week the FED released its meeting minutes. It’s always a good idea to take a look at the minutes as inside you can find interesting long term trends that aren’t yet recognized by the market but will eventually surface. More →

  • 05 Apr
    Healthcare Is The Only Sector Where Investing Now Isn’t That Bad Of An Idea

    Healthcare Is The Only Sector Where Investing Now Isn’t That Bad Of An Idea

    • Fundamentals and the long-term demographic trend show that the healthcare sector is undervalued.
    • As it’s a recession-proof sector, largely diversified investors should be overweight healthcare and seize the current halt in price growth.
    • We’ll discuss the top ten healthcare stocks and show that there is something for everybody to invest in: dividends, stability, low valuation, high valuation, growth, takeovers, etc.

    Introduction

    Yesterday’s article focused on how baby boomers will put downward pressure on stocks in the next 15 years. Today we’ll discuss a way to make money on the same trend. More →

  • 06 Dec
    Read The News, But Don’t Trade On It. Sven Tells You Why.

    Read The News, But Don’t Trade On It. Sven Tells You Why.

    • Today we’ll look at a few examples and discuss how news influences markets and creates opportunities.
    • In the end, trends prevail, so focus on them.

    “Yesterday’s News Is Tomorrow’s Old Paper”

    The job of financial journalists and analysts is to be constantly producing copy to fill the empty spaces in newspapers and online platforms. Wherever you look, there is breaking news, opinions, and analysis about the latest news or hype filled with advice for your portfolio and on what you should do. As most online platforms make money from ads, news has to be constant, spectacular, and sold to you as very important. More →

    By Sven Carlin Investiv Daily Trends
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