Saturday, November 10, 2007

Not Buying On The Dips

This week has been a tumultuous one for stocks, especially the financial, retail, and technology sectors. For me, it's been very tempting to try "buying on the dip." Many financial and retail stocks are at a 52 week low. In addition, some financial stocks have trailing dividend payments in of up to 11%.

However, with the exception of a foreign ETF, I have resisted "buying on the dip" for beaten down stocks. Here are my reasons for holding back:
  1. Still more bad news coming. Credit market issues, once limited to home builders, subprime mortgage originators and mortgagees, continue to expand. Recently, retailers, financial institutions and even insurance have been pulled into the mess. Unfortunately, it seems to be trickling further to manufacturing. I don't believe any company yet understands their full potential exposure to the credit market issues.

  2. Market strength and breadth is poor. I continue to be unimpressed with market strength based on the comparison of new lows new highs. The number of new lows is often close to or exceeding new highs, sometimes even on up days. It appears only a few stocks are driving up the market indices.

  3. 2002 broke my habit of buying on the dips. I profited from buying on the dips in the late nineties through 2001. Unfortunately, in 2002 stocks just kept going lower, and my "buy on the dip" investments created significant losses. After that experience, I stopped buying on the dip.

To note, I am extremely tempted by some financial and housing stocks which have had significant declines. But I continue to resist.

However, I am considering small purchases in three areas, foreign ETFs, commodities, and farm equipment, all of which have remained relatively strong during this correction. As I have written in before in Fed Rate Cut Signal and my 10/15/07 Stock Buy List Update, FXI(bought on Friday 11/9/07), BHP, and CNH are selections which I may buy at these levels. I will also give PCU consideration if it further declines below its $114.07 close on November 9, 2007.

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC


Armchair Fiduciary said...

What do you make of this Old Republic buy of MGIC and PMI? Looks like they were just as tempted as you to go after oversold financials in their own business. Interesting times...

traineeinvestor said...

"Buy the dips" is, in my experience, seldom a good strategy. Certainly, it is not one that stands up to close examination.

If the market is trending up, you might as well put your money to work as quickly as possible and just buy as and when you have cash available. Time in the market is generally better than attempting to trying to time the market.

If the market is in a down trend, buying dips is a good way to lose money.

Anonymous said...

Buying on the dips is usually a great strategy unless a specific industry, like housing, is going through a tough time. It looks like housing will be done with all the first adjustment on the ARMs middle of next year. Things should start to return to normal after that.