Buy the Dip or Sell the Rally?

A common theme that many of us used in the late 1990’s through to 2008 was to “Buy the Dips.” The idea behind Buying the Dip is when you are in a bull market that is going up you take the opportunity in a correction to pick up stocks that had fallen below their highs and looked relatively attractive. In a bull market it usually worked out well.

I spoke a bit in my last blog about the difference between my style of money management called Fact (Rules) Based Investing versus the mainstream norm of Modern Portfolio Theory. As a reminder, Fact Based Investing follows strict guidelines and takes theory, human error, human bias and emotion out of the investment process. Buying the Dips in either method might be called out as “speculation” rather than a recognized investment process and in some cases, you would be correct, especially if you adhere to Fact Based Investing. But to be called speculation you would have to know what market you are in.

If you are in a confirmed bear market where the signals are flashing red, or even yellow for caution, Fact Based Investment Advisors are not allowed to place money into equities, even if there are dips. In the Buy and Hold world some advisors might still be buying dips depending on what market we are in as their general concept of managing money is to be fully invested.

In summation Buying the Dips in bear markets is speculation, Buying the Dips in bull markets regardless of what process you use is acceptable as both practices believe that equities will go higher and could capture an opportunity to benefit their client. Not to disparage the Buy and Hold crowd too much as they haven’t looked at Fact Based Investing, so they have no guidance system, no radar, or rules to keep them disciplined. It doesn’t make it right in my mind, but it excuses them from being intentionally reckless as they are doing what they’ve learned.

The past few weeks we have had days where the market rallies followed by more down days. Fact Based advisors like myself have been encouraging investors to sell into these rallies rather than buy the dip. Why? Because we have been virtually out of the stock market since March 4th when our indicators turned red (yellow) and we never add to stocks when we are in the sell or caution zone.

What we see from the bigger picture is institutional investors are selling into rallies and the rallies eventually hit a "wall of selling" and peter out.

Some interesting stats from the twitter handle of Michael Burry. Burry is the famous investor who correctly called the mortgage-backed security crisis in 2007 and waited a year before being proven right when the stock market crashed 50%. Burry’s Twitter handle is @micheaeljburry if you want to follow him but you have to be quick as he deletes them shortly after as he has been warned by Twitter that he has too much influence on the markets. If you want to learn about his experience, the movie The Big Short is a highly entertaining movie/documentary.

Burry points out that most of the top rallies in history turn out to be what the industry terms a “Dead Cat Bounce.” People get excited that the selling is over but it's usually a false flag. He notes that 12 of the top 20 on day rallies in the Nasdaq have happened during the time period between 2000-2003 when the Nasdaq dropped 78%. Not a time to be “buying the dips” for sure.

To add to that, 9 of the top 20 one day rallies in the S&P 500 date all the way back to the Great Depression and the crash between 1929-32.

So the bottom line is we recommend using any strength such as today to sell equities and have available cash ready to deploy if this market depreciates like we think it will, or at very least, wait for the indicators to turn green.

As I conclude I leave you with this graph. It is from 1929. Look at the initial drop of 48% from September/29 to November/29 of 48% followed by an amazing 6-month rally of 47% from November/29 to April/30. What do you suppose investors thought? Likely, “Yay, we are back to the Roarin’ Twenties”. But then look what happened, an agonizing 86% drop over the next 27 months.

The chart is purely hypothetical as they never had the technology back then to do Fact Based Investing and it is based on history which does repeat itself, but we have no guarantee it will. But the amazing benefit of adding in Gold and using a Fact Based Investment process (check out the gold boxes on the right) would have paid off in spades versus losing 89% in a traditional Buy and Hold. This is simply too great to ignore if you are looking to protect your family's wealth the next time an economic crisis hits us. Education is your best investment.

Yours in Faith, Family and Finance,

Daryl Cooper