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'Buy the Dip' Has Delivered Again

18 November 2013 in Trading Ideas

Let’s give credit where credit is due: Six weeks ago, many Wall Street analysts declared that the hit stocks were taking, in part because of government shutdown worries, just wasn’t that big of a deal.

Turns out, they were right.

At that point in late September, equities had already exhibited their resilient nature. Not only was the S&P 500 up more than 18% in 2013, but anything close to a notable pullback in the market – a blip in both February and April, along with more extensive retreats in June and August – really did prove to be a broader buying opportunity for investors.

Why, these analysts suggested, should this be any different?

In fact, as Bank of America Merrill Lynch’s equity and quantitative strategist Savita Subramanian pointed out at the time, history suggested a post-shutdown rally was the norm. Since 1981, there have been 11 federal government shutdowns. After each one, the S&P has increased an average of 2.5% in the month that followed.1

David Bianco, chief US stock strategist at Deutsche Bank, said at the time that despite the shutdown’s impact on stocks, he still believed the S&P 500 could hit 1750 by the end of the year.

Well, Bianco was wrong: the S&P crossed 1780 earlier this week.

Indeed, from the post-government shutdown trough on Oct. 9, the S&P 500 has now risen 7.6% to yet another all-time high.

buy the dip motifOf course, as one would expect, this phenomenon has also played out with numerous individual stocks. Our Buy the Dip motif, a portfolio of stocks that exhibit behavior indicating that a recent decline in price could be a buying opportunity, is up 6.1% in the past month. And since its inception in April 2013, the motif is up 43.1%.

During those same timeframes, the S&P 500 is up 4.6% and 14.6%.

Simply put, the current market is in the mode where even a whiff of investors contemplating a risk-off mentality eventually subsides. Earlier last week, for example, small-caps, Nasdaq 100 names and cyclical stocks were all underperforming.

Then – pow – a strong jobs report pushed both interest rates and stocks another leg higher. In the current investment climate, something is always saving the day.

At least, until it doesn’t. As with most strategies, they can work until they don’t, and at that point, preservation of capital can – and probably should — become the primary motivation. A look at recent history shows a ‘buy-the-dip’ strategy worked very consistently during the market run-up through late 2007, for example, but it wasn’t much use when the broader market lost more than half its value during the next 18 months.

For now, however, one can understand how “Dippers” may be feeling somewhat invincible.

1Chris Dieterich, “Wall Street on Washington: Keep Calm and Buy the Dip,” WSJ.com, Sept. 30, 2013.