Keith Fitz-Gerald: The market’s recent 45-day rocket ride was the longest uninterrupted climb without a triple digit decline since 2006 – until Tuesday when the Dow lost 203 points. The sell-off begs the question: Should you buy the stock market dip?
First things first. The sky isn’t falling even though there are a lot of investors who believe the worst after two tough days on Monday and Tuesday.
In fact, if you remember your recent history, we used to eat declines like these for breakfast. Two-hundred-point days were not uncommon. For that matter, neither were 400-point swings only a few years ago.
What investors need to realize is this: The stock market has come a long way in a hurry since establishing panic-driven lows on March 6, 2009.
The S&P 500, for example, has tacked more than 100%. Compared to those gains, Monday and Tuesday’s losses are just rounding errors in the big scheme of things.
This means a portfolio worth $500,000 would be worth $1,000,000 today if it had been invested in something as plain vanilla as an S&P 500 Index fund (NYSEarca:SPY) only three years ago.
On that basis alone, I could make the case this is the pullback everybody has been waiting for.
But that’s the problem…everybody is waiting on the same thing.
Waiting for a Stock Market Dip
According to various reports, most investors remain on the sidelines for reasons that are as obvious as they are self-evident – worries about debt, politics, jobs and the future dominate nearly every poll.
You can see that if you look at stock market volume.
It’s down 50% since the financial crisis began. According to CNBC data, last Friday a mere 3.2 billion shares traded hands on the NYSE. Three years ago, that figure was 7.5 billion on an average day.
This complicates technical analysis because it limits the statistical validity of many analytics that might otherwise be functioning normally.
So what’s a technical trader to do?…
Figure 1: Source: Fitz-Gerald Research Analytics, Money Map Press
- Generally speaking, most of the big “glocals” we favor are flush with cash, running leaner than they have been in years and have built up the defenses necessary to weather a downturn without undue impact on earnings.
- This is the cheapest 52-week “peak” in terms of PE ratios we’ve seen since 1989. And there’ve been 34 of them according to Bloomberg so this is not inconsequential. History shows shrinking price/earnings ratios generally provide a margin of safety to the upside.
- Corporate profits are predicted to reach record levels through 2013 so there’s potentially another 12 months of runway; to be fair I think it’s actually about eight because I believe profits will contract a bit faster than other analysts.
- Team Bernanke and his central banker buddies are in pom-pom mode. Further stimulus is not only likely, but highly probable. This is absolutely wrong, but probably good for overall prices moving higher since cheap capital is like drugs for the addicts. Ultimately, we will have to pay, but that’s a subject for another time.
What if I’m wrong?
That’s part of the game. There are no guarantees.
Nobody knows the future, which is why I also encourage the use of trailing stops to help protect capital and capture gains.
Not only do trailing stops remove the emotional turmoil of tough days, but having them in place allows you to concentrate on the upside – even when everyone else is concentrating on the downside.
Even that, though, is a bullish sign.
When it’s easier to scare the hell out of people than it is to attract them to the markets, the smart money nearly always goes long.
Related: S&P 500 Index (INDEXSP:.INX), ProShares Ultra S&P500 ETF (NYSEArca:SSO), Direxion Daily Small Cap Bull 3X Shares (NYSEArca:TNA).
Keith Fitz-Gerald is the Chief Investment Strategist for Money Map Press, as well as Money Morning with over 500,000 daily readers in 30 countries. He is one of the world’s leading experts on global investing, particularly when it comes to Asia’s emergence as a global powerhouse. Fitz-Gerald’s specialized investment research services, The Money Map Report and the New China Trader, lead the way in financial analysis and investing recommendations for the new economy. Fitz-Gerald is a former professional trade advisor and licensed CTA who advised institutions and qualified individuals on global futures trading and hedging. He is a Fellow of the Kenos Circle, a think tank based in Vienna, Austria, dedicated to the identification of economic and financial trends using the science of complexity. He’s also a regular guest on Fox Business. Fitz-Gerald splits his time between the United States and Japan with his wife and two children and regularly travels the world in search of investment opportunities others don’t yet see or understand.