Why buying the dip is no longer a 'foolproof' strategy for investors
Investors should no longer just close their eyes and buy the dip, says one market strategist.
Advice that stands in contrast with a habit formed by many over the last decade-plus in the stock market.
"I think [buying the dip] became a reflexive strategy among many people, and a very good one actually, because it was almost foolproof," Interactive Brokers Chief Strategist Steve Sosnick told Yahoo Finance Live.
"When the Fed was pumping money into the system and when there was fiscal stimulus, there was this constant flow of money. So, really every dip was a buying opportunity," he said.
But this year, with stocks down for the year, dip buyers have not been rewarded.
The tech-heavy Nasdaq (^IXIC) is down about 22% year-to-date, while the S&P 500 (^GSPC) is off roughly 12% so far in 2022. Stocks have been on a downward trend since the Federal Reserve began telegraphing higher interest rates and quantitative tightening in order to combat inflation.
"If you're a believer in 'Don't fight the Fed,' what is the Fed doing?" Sosnick asked. "They're talking about taking money out. So, that means that buying the dip is not a foolproof strategy anymore. There will always be dips that are good trading opportunities. But what I'm implying here is, don't just close your eyes and buy the dip because it's a dip."
However. Sosnick says investors should expect buying opportunities to emerge during big market declines.
"What you're going to get in response [to broad declines] are good names thrown out — thrown out alongside the less good ones, the crappy ones. And so, what it behooves everybody to do is think like a value investor," he said.
"If you're buying something that's got good solid earnings and good solid cash flows — and I want things that are tangible earnings and cash flows, not just prospects — then you can really start to assess in a good way how...you have opportunities," said Sosnick.
"Otherwise, you just don't want to buy stuff because it's down. That doesn't make sense," he added.
Last week the S&P 500 rose 6.6% — snapping a 7-week losing streak.
The index saw its best one-week performance since November 2020. Consumer Discretionary stocks, which are among the most beaten down equities this year, led that rally.
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Ines is a markets reporter covering equities. Follow her on Twitter at @ines_ferre
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