Waiting to buy the dips? You better be quick

Jeff Macke

After the easy ride for stocks over the last year, the pullback of the last couple days feels much worse than it really is. The S&P 500 (^GSPC) is only down about 1%. That’s not bad considering the horrific nature of ISIS’s actions in Iraq and Syria which resulted in a breakout in the price of crude.

As Hank Smith of Haverford points out in the attached video, the lack of volatility since 2011 has made us all just a little twitchy. That’s certainly understandable but it can be a risk to your portfolio if you’re not careful. Since Smith has been pounding the table on looking for chances to buy dips all year he seemed like the right guy to ask for some perspective on whether or not the last two days was the start of a much larger collapse.

“Bull markets do not end by exogenous geopolitical events such as the Iraqi situation,” Smith says. What kills bull tapes are anticipation of a recession and / or over-involvement by the central banks. Despite a negative GDP print in the first quarter and downbeat forecast from the World Bank, there isn’t yet much sign of a recession.

As for central banks, Mark Carney of the Bank of England hinted at a rate hike this year but in the context of what is now six years of interest rates hovering near zero in the U.S., it’s ludicrous to say the Fed or central banks anywhere else are too tight.

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Just as he said in late April, Smith says the greatest risk for investors is missing rallies. The dips so far this year have been shallow and sharp. Speaking of the January drop, Smith notes that “If you’re finger wasn’t on the trigger ready to buy you completely missed that opportunity.”  The same thing happened in April.

Smith is looking for that price action to continue for much of this year. That means the dominant strategy for most people is just sitting on the sidelines and riding it out through the bumps. For the more active traders putting in some bids below the market might make sense.

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