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Stocks Are Shrugging Off Another Dip

12 July 2013 in Trading Ideas

If 2013 has been marked by any credo related to equity markets, it’s that any broader pullback in stocks has largely proven to be merely temporary.

Or, put another way, “buying the dip” – the strategy of stepping in to purchase a stock after a price decline — has been nearly foolproof this year.

We saw it in late February, when the S&P 500 Index retreated nearly 3%, only to rise 7% into mid-April. Then, following another hiccup, stocks put up another jump of 8% to their highs of the year.

And here we are again, after possibly the only legitimate threat to investors’ confidence – a five-week, 6% slide in stocks from that mid-May high to late June – watching stocks climb to within 2% of another new high.

This “buy the dip” mentality has coincided with the early performance of our (appropriately named) Buy The Dip motif, which has risen 23.6% since its creation in April 2013. During that same timeframe, the S&P 500 has risen 4.4%.

buy the dip motif

(The Buy The Dip motif isn’t focused on broader stock indices; it contains a portfolio of individual stocks that have experienced recent price declines and may be considered good candidates for a rebound).

Of course, this recent move by stocks hasn’t been without some fundamental justification. The recent employment report showed not only a third strong monthly gain (with 195,000 jobs created), but figures for April and May were also upgraded to the tune of a combined 70,000 additional jobs created.1

Meanwhile, the fact that hourly wages rose 0.4% year over year has dovetailed quite nicely with recent economic reports that show strong demand for goods by consumers.

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In addition, the recent boost in interest rates over the past two months (as well as the steepening yield curve) has been a boon for the stocks of banks, which are in the business of borrowing short and lending long.

However, one mustn’t count out the longer-term resilience of US stocks as evidence of this country’s proud standing as the equity market representing the “cleanest dirty shirt,” as PIMCO investment chief Bill Gross once put it. When compared to the flat performance so far this year from Europe’s most stable countries (UK, German, France), and the tough sledding for stock investors in emerging-market countries like China, Brazil and Russia, the S&P 500’s 15%-plus performance this year looks even better.

As with most strategies, they work until they don’t, and investors are wise to keep in mind the heady 2007 peak in stocks that took more than five years to repeat (excluding inflation). It’s worth wondering whether investors would maintain their recent optimism in the face of a more substantial correction that takes more than a few weeks to disappear.

1Neil Shah, “Five Takeaways From the Jobs Report,” WSJ.com, July 5, 2013.