If investors have learned anything since the current bull market began on March 9, 2009, it is to “buy the dips.” The bottom line is that any and all problems, fears, and/or crises (both real and imagined) over the last 6 years have been met with, almost without exception, a spirited reversal. Dubbed “V-Bottoms,” these instantaneous changes in market mood have tended to quickly reverse most, if not all, of the declines seen in the stock market in a matter of days/weeks, as investors scramble to buy whenever prices decline.
We have argued that global QE is likely the reason for the market's propensity to put in V-Bottoms. In what is really a close relative to the “Bernanke Put,” investors know that the ECB and the BOJ continue to print a big pile of new money every month. And since that fresh cash usually goes where it is treated best, it seems that a fair amount continues to find its way into U.S. stocks – especially when there is a dip in prices to be bought.
But with Greece's travails dominating the headlines, China diving 30% in 3 weeks, commodities breaking down, Puerto Rico talking default, the Fed preparing for liftoff, and any number of big-picture indicators suddenly looking sick, I've received a fair number of questions from financial advisors recently, wondering if this time is going to be different.
By now, everybody knows that the dips should be bought. But the question is if either a “Grexit” or the big dive in China will change the game. Will dip-buying become a thing of the past? Is the next big, bad bear market upon us? Or… Should investors stop overthinking things and just continue to put money to work into any and all declines, I've been asked.
Where's the Dip?
Before I get into a discussion of the issues at hand on these calls – you know, whether Greece matters, if China will become a global contagion, or if the Fed has reason to wait until 2016 (they don't, by the way), etc. – I tend to make one very important point on these calls. As gently as I can, I ask the following question: “Exactly what dip are you referring to here?”
Take a look at the chart below and you should see my point pretty quickly. While everyone has been fretting mightily about the status of the “aGreekment” or if Germany will just say “Nein!” to any and all new proposals, as well as whether or not the swoon in Chinese stocks will lead to global economic difficulties, the stock market hasn't really noticed.
S&P 500 Index – Weekly
If you will recall, the first Greek crisis (circa 2010) produced a decline of about -16% on the S&P 500. The second go round with Greece, which was combined with the children in Washington managing to get the country's debt rating downgraded, resulted in a decline of -19%. Then in 2012 – the last time Greece was a real story – the S&P surrendered somewhere in the vicinity of -12%.
Therefore, it is safe to say that Greece has managed to roil the markets at times and as a catalyst for dips in the stock market, should probably be respected.
However, this time around, the question is really, “Dip? What dip?” From the all-time high set on May 21, 2015 (which was tested as recently as June 23rd), the S&P 500 has pulled back just -3.95% during the so-called crises in Greece and China.
So despite the surprise “Greferendum” (which was political grandstanding at its finest), the last second “aGreekment,” and the potential for a Germany-imposed 5-year time-out from the Eurozone, the stock market hasn't even fallen 5% from its high. And I'm sorry, but a pullback of -3.95% doesn't really qualify as a “dip” worth buying. Well, not in my book, anyway.
The Real Question Is…
From a shorter-term perspective, all the hysterics seen on a daily basis haven't actually done much to change the charts. Sure, there has been a lot of excitement and some big swings intraday. But the S&P 500 is still stuck in a trading range and shows no signs of embarking on a trend any time soon. As such, the real question is when will this volatile up-and-down, back-and-forth environment end?
S&P 500 Index – Daily
Or is this just the way the game is going to be played from now on? Should investors simply ignore the short-term machinations created by the computer-driven algos that make decisions at the speed of light and focus on the longer-term trends instead? And with everyone in the game now using fancy technical indicators, is trend-following a thing of the past?
These are the questions that have been rattling around in my brain of late. These are the questions that investors will need to answer in order to play the game effectively in the coming years.
And getting back to the theme of this morning's missive, yes, by all means, feel free to continue to buy the dips as long as the central bankers of the world keep printing yen, euros, or whatever at a healthy clip. Because, the bottom line is it is a bull market until proven otherwise. And when the bulls are running, buying the dips – assuming there actually is a dip to buy, that is – continues to be a pretty good way to play.
Read More – StateoftheMarkets.com
David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.