Dip Buying Is Alive And Well

Despite elevated market levels, and fears of a correction, the dip buying mentality is alive and well as Reuters reports in “Buy That Dip, Baby:”

The new national pastimes are calling the top of the stock market, commenting on Middle Eastern affairs and — buying dips.

Stocks have shown remarkable resilience as investors snap up any drop in prices, even in the face of what seem like considerable risks — an overbought market and a still potentially explosive situation in the Middle East.

Confidence in the economy, strong earnings, and inflows into equities from bond funds have been enough to push indexes to new highs on an almost daily basis even if light volume and slight gains show investors are not making aggressive moves.

Robert Auer, a fund manager at SBAuer Funds in Indianapolis said that after eight months of outflows his Auer Growth Fund had started to see inflows.

“I’m wondering if this is happening at American Funds and Fidelity and everyone else,” he said. “I’m having to put it to work because we typically don’t hold any cash, so it is causing me to do buying.”

Bond funds have seen three months of outflows, the longest streak in more than 2 years.

Over that period $23 billion has moved out of bond funds while $16 billion has flowed into equity funds, according to data from the Investment Company Institute.

Rising yields have accompanied increasing optimism over the economy that will again be tested with retail sales and industrial output data during the week.

“Investors right now think the pullback is already here and they’re not buying stocks – and not selling but not buying at a time of inflows is forcing the market to drift higher,” said Thomas Lee, U.S. equity strategist at JPMorgan in New York.

Volume hit its lowest levels so far this year on Tuesday with just over 7 billion shares traded on the NYSE, Amex and Nasdaq compared to last year’s average of around 8.5 billion.

Lee is expecting a pullback in the March and April time frame, with the S&P; 500 rising to 1,333 before falling to around 1,250, taking the market back to where it was in late December.

“You really need to start buying at the 1,270 level,” he said. “You need to be selective and getting ready to buy that dip.”

The 1,333 level is the double-your-money mark from the bear market intraday low of 666.79 in March 2009 and is seen as a significant level by some investors.

[Emphasis added]

There you have it. 1,250 is the first number I have heard of where the eventual correction might end up, which is about a 6% pullback from current levels.

While buying dips in a bull market can have its obvious rewards, it only works….until it doesn’t. And that is the moment when a pullback turns into an actual trend reversal and market direction changes from bullish to bearish.

I for one will most certainly not rely on forecasts, like the above, by blindly using the 1,270 as a buy point. Make sure that the actual uptrend remains intact before deploying more monies in the market. That may cause you to enter at a slightly higher level, but you will have reduced downside risk considerably.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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