The Case for Buying the Dip

PUBLISHED Jul 27, 2022, 6:46:07 PM        SHARE

img
imgzen investor blog

The case for buying the dip is based on the availability of undervalued assets in a market that has suffered indiscriminate selling.

Chart 1. Oversold and ripe for a rebound.

On Thursday, May 12th the S&P 500 hit an intraday low of 3859 before recovering to close at 3930. At the low point, the market was down 19.5% from its January peak and a whisker short of entering bear market territory.

Then on Friday, May 13th the dip buyers showed up again, driving the market up another 2.4% to close the week at 4023. That left the market with a peak-to-trough decline of 16.1%. Investors are now left wondering if the bottom is in.

Triple Cross Daily

I don't know if the bottom is in, but I do know that there are some outstanding bargains to be had. The market may only be down by 16.1% but the majority of stocks - 65% - are already in a bear market. The median stock in the S&P 1500 Composite index, which covers large, mid and small caps, is down 25.5% from its 52 week high.

Chart 2. Major Markets

Of the seven global equity markets I cover in this chart, Russell 2000 (small caps) and NASDAQ (tech dominated) are currently in bear market territory. Some of the other markets may soon follow, but I think most of the damage has already been done.

Major Markets YTD

Chart 3. Market Sectors

Of the eleven primary market sectors, this chart shows the top three and bottom three performers. I do it this way to keep things simple.

Money has been flowing out of tech, consumer discretionary, and communications services, and into energy, utilities, and consumer staples. This trend will probably continue as long as there is uncertainty caused by the Russia-Ukraine war. Demand for oil & gas remains high, the global economy is taking a hit to growth. and inflation will continue to rise until energy prices begin to come down.

Sectors YTD

Chart 4. Industries

Of the 60 industry groups tracked by S&P Global Markets, I highlight the top and bottom three to keep this chart simple. Semiconductors, apparel, and autos are in bear markets and ripe with bargains for those who can tolerate a little more pain in the near-term.

Industries YTD

Chart 5. Styles - Growth vs. Value

After underperforming growth last year, value is where the money is flowing. I see this as another durable trend. Growth has been hit hard by the slide in tech stocks this year. Small cap growth is where I would be looking to pick up quality names on the cheap.

Styles YTD

Chart 6. Size

Small caps are still lagging. After underperforming last year, they are struggling to keep up this year. Mid caps were almost tied with large caps last year, and the are in the lead this year. The flow of money into mid caps looks like a durable trend.

Size YTD

Chart 7. Factors

There are more than 100 factors to choose from, so I had to cut the list to just six, in order to keep this chart reasonably easy to digest. High liquidity names are getting pummeled this year as asset managers sell their most liquid positions to meet shareholder redemptions.

The top performing factor so far is dividend yield. I'm not sure about the durability of this trend, because rising bond interest rates will begin to compete with dividends at some point.

Factors YTD

Chart 8. Sensitivity to the business cycle

In this chart I divided the market sectors into two groups - those that respond more vigorously to the changing phases of the business cycle (cyclical), and those that respond less vigorously (defensive).

With the economy still in growth mode, cyclical stocks should do better than defensive stocks. That hasn't happened yet this year, and maybe the market is sending a signal that the economy isn't as strong as many would like to believe.

The flow of money away from cyclicals and into defensive looks durable.

Business Cycle YTD

Chart 9. Bonds

It's interesting to watch how the various flavors of bonds react to Quantitative Tightening. So far it looks like Treasury bonds are seeing the most outflows. That's understandable, given the sharp rise in the 2-yr and 10-yr rates.

Keep an eye on junk bonds, because they are especially vulnerable to an economic slowdown. As they continue to lose momentum, the risk of recession increases.

Bonds YTD

Chart 10. Countries

There are 50 countries that are represented by ETFs. Here are the top and bottom performers YTD. South America is having a resurgence this year, while Europe is struggling with geopolitical issues and heavy sanctions - both imposed and threatened.

Countries YTD

Final Thoughts

We are now well into 2022 and the trends we have established thus far will probably continue as long as the war, and all the uncertainty it brings with it, remains in place. By keeping an eye on money flows among these asset categories, you can gain some insight into what could be a durable trend, and what's just noise.

The trends that look the most durable to me at this time are value vs. growth, mid cap vs. large and small cap, defensive vs. cyclical, and commodities - especially energy - vs. tech.

European and Asian economies seem more vulnerable to the fallout from sanctions against Russia. There is a chance that Europe may slip into a recession later this year, and some Asian countries may follow after that.

The US will likely avoid a recession this year, but the picture may change in 2023. The major Wall Street strategists have been reducing their price targets for year-end, with an average of 4600 for the S&P 500. That would represent a gain of 14% from where we are now, and a year-over-year loss of 3%.

As the late Marty Zweig used to say, don't fight the tape and don't fight the Fed. The tape is weak and the Fed appears to be gearing up to bring inflation under control regardless of what happens in the stock market. If the market ends the year with a small loss, it behooves investors to pick their spots carefully. That's why I like to follow the money.

Originally Posted on zeninvestor.org

SPY, Buy

SPDR S&P 500 ETF...
Return: 44.52%

SPY, Buy

Return: 44.52%


Sound investments
don't happen alone

Find your crew, build teams, compete in VS MODE, and identify investment trends in our evergrowing investment ecosystem. You aren't on an island anymore, and our community is here to help you make informed decisions in a complex world.

More Reads
Berkshire Hathaway Forecast ahead of Quarter 2 2022 Earnings Report
Image

Berkshire Hathaway announced its Quarter 1 2022 earnings on 30th April. During the first quarter, earnings declined due to slowing economic growth and stock market pullback. Berkshire Hathaway quarter 2 2022 earnings are expected to be published on 5th August. Let's look at the current market trends and Berkshire Hathaway's performance to determine a possible outcome of the quarter 2 2022 earnings.

What Happened to Netflix Stock? Stranger Things About the Netflix Stock Drop in 2022
Image

What Happened to Netflix Stock? A Horrible Series or just a scary episode of the Netflix Stock Drop in 2022? Let's explore everything!

Mrmd, bros
Image

Headed for substantial growth

Bank of America Stock Price Today - BAC Making Huge Revenues in a Bear Market
Image

Are you hunting the high-value stocks to make high returns even when the pessimism prevails? Bank of America Stock Price Today is just at the lowest level.

Why it’s Time to Start Buying TESLA Long
Image

Is it possible to sell Tesla, the most shorted stock globally, as a potential long buy? On 21 July 2022, Tesla’s stock surged by 10%, attributed to its strong earnings in its Q2 2022 results. The surge was an unpleasant surprise for short traders, who made an estimated mark-to-market loss of over $1 billion.

Estimating Future Stock Returns, March 2022 Update
Image

Well, finally the bear market… at 3/31/2022 the S&P 500 was priced to return a trice less than zero in nominal terms.

Feeling Risky? Marijuana Stocks May Jump From Legislation
Image

Senate Democrats Working on Bill to Decriminalize Marijuana

IS VISA STOCK A BUY? WHY & WHY NOT?
Image

Is Visa stock a buy? Let's discuss why it is a strong buy and why it is not due to the pro-cyclical nature of the stock!

Is Rivian a Buy Right Now?
Image

Take a Look at the Hot New EV Release

Should You Buy Tesla Stock?
Image

Should you buy Tesla Stock right now or after the much-awaited Tesla Stock Split expected in August?

PFIZER COMPANY AND ITS STOCK ANALYSIS AND FORECAST
Image

Pfizer, the world top class company, develops and manufactures drugs or medicine and vaccines, having approximately 3.7 billion shares on NASDAQ.

Why Should You Know About Amazon Stock?
Image

Amazon issued its IPO at $18 per share trading under the NASDAQ with symbol AMZN. Subsidiary companies Zoox Kuiper System Amazon Lab126 Amazon Web Service.

ETSY: A TOP GROWTH LONG STOCK
Image

ETSY is a well-run company and a reasonable investment for a long-term investor. The company's unique business model is increasingly taking it to the top of the game. ETSY has become the top e-commerce go-to for consumers in many categories, especially hand-made and vintage collections.

Why Adobe is a Long Buy and Analysis of Q2 Fiscal 2022
Image

When considering to purchase, it is wise for an investor to analyze a stock's past performance. Adobe stock has been growing steadily and consistently in the past. As expected with any stock, it has fluctuated from time to time, depending on the market factors, but the performance has been good overall.

With Oil Sky High, is Exxon a Buy?
Image

Pain at the Pump May Tempt Investors to Grab Big Oil

Here's How You Can Pay Your Utility Bills With Sempra Energy Stock Dividend
Image

Amid rising energy prices and the inevitable recession, the Sempra Energy Stock dividend is something you can rely on.

Why is Dominion Energy Stock Dropping? Is It Still Safe to Invest?
Image

Dominion Energy Stock is dropping for a long time, yet its dividend has not stopped attracting investors.

Resources for Publishers
Resources for New Investors
Boosted with BossCoin
Financial Literacy Leaders
user_profile
Tom Hamilton
user_profile
Wise Intelligent
user_profile
Mark Robertson
user_profile
Kevin Matthews II
user_profile
Akeiva Ellis
user_profile
Brendan Dale
user_profile
Kenneth Chavis IV
user_profile
Sharita Humphrey