For equity-index investors who have been riding the 21% rise in stocks over the past 11 months, an introduction to the “buying the dip” strategy hardly seems necessary.
Buying the dip in a specific stock, or after any severe price decline, is what investors may choose to do when they believe a profitable opportunity has arisen from an extreme selloff. For short-term investors, the hope is that the price decline was too extreme and irrational and that the stock will quickly revert to reflect the company’s true fundamentals.
Consider, as ETF Daily News recently did, this year’s performance of the Nasdaq, which is up more than 9% in 2013. The website explained that every decline of the index to its 50-day moving average this year has quickly led to a new multi-year high.1
This philosophy writ large is the idea behind our new Buy The Dip motif, a portfolio of stocks that have recently sold off sharply but are now consolidating in price, which can be a signal of price reversion.
An element of risk is present, of course, as many stock-price breakdowns are signals of a parallel crumbling of company fundamentals. It’s worth watching closely and relying on an exit strategy because some stocks may not be able to shake negative price momentum and the perceived dip turns into a significant drop.
1ETF Daily News, “Buy the Dip in the Technology Sector?”, etfdailynews.com, May 1, 2013, http://etfdailynews.com/2013/05/01/buy-the-dip-in-the-technology-sector/.