“Buy the dip.” It’s a market cliche and has been since the depths of the financial crisis, proving to be especially true over the past couple of years.
The market’s most recent dip transpired earlier this summer when the Dow industrials dropped roughly 4 percent between July 22 and Aug. 7. Since then, stocks have recovered their losses with the blue chip index once again sitting at record high levels.
Traders looked to the Dow’s 200-day moving average as a key signal to buy at the Aug. 7 low. The Dow bounced back after crossing its long-term trend line, which the index has done four other times in the past two years. Many investors see these pullbacks as key opportunities to buy.
“You are rewarded by taking on uncertainty,” Portfolio Wealth Advisors CIO Lee Munson said. “You do not make money by getting rid of uncertainty. So you want to look at buying the dips or rebalancing the dips as ‘if I get rewarded for taking on uncertainty risks, then why on earth would I want to spend much time not taking on uncertainty risk?'”
Munson said investors who have globally diversified portfolios, including stocks and bonds, are positioned to take on a market correction. When it comes to investing in individual stocks, he said it is important for investors to “do their homework.”
“Set the price and the position size,” he said. “At what price will I buy, how much of my portfolio will I dedicate to it, and am I going to buy all at once or am I going to buy multiple times?”
Investors willing to do extra homework to prepare a shopping list of stocks could reap even bigger rewards from a “buy the dip” strategy.
Since the Aug. 7 dip, Monster Beverage is the top performer among large-cap stocks in the Russell 1000. Monster’s stock is up 34 percent, benefiting largely from Coca-Cola‘s announcement that it was buying a 16.7 percent stake, worth $2 billion, in the company.
Even after considerable gains last month, analysts remain bullish on Monster with an average price target of $94.50, 8 percent above where the stock trades today, according to FactSet.
“We believe the deal is meaningfully positive for Monster, creating significant international and U.S. revenue synergies,” Stifel Nicolaus analysts said in an August research note.
Internet software and service stocks are also standouts since the low.
Twitter shares have jumped roughly 14 percent, despite lackluster sentiment overall for the stock this year. Cloud computing company Rackspace is also up 14 percent, helped by a new stake from activist investor Blue Harbour Group.
Yelp wins among the Internet stocks, up more than 20 percent. The online review site’s outperformance has been helped by bullish sentiment from analysts who predict the price could increase by at least 10 percent on average.
Pharmaceuticals are another winning group of stocks since the market’s recent low. New York-based Intercept Pharmaceuticals is up more than 30 percent following positive results in mid-August in a trial for its liver disease drug. The stock remains a favorite among analysts who predict its price could surge 62 percent to $475 on average.
Some market pros say don’t wait too long before making a shopping list of stocks to buy on the next market dip.
Dan Genter, whose RNC Genter Capital Management handles nearly $5 billion in discretionary assets, said long-term investors should not view pullbacks as the only opportunities to enter the market.
“I think any pullbacks you have here would certainly be buying opportunities, but frankly if you’re a three- to five-year investor, or even a two-year investor, if you sit and wait for a pullback, that pullback may never come,” Genter said. “So the only way around that frankly is to average in.”
Genter advises new investors to enter the market over a period of four to six weeks.
“That way you can insulate yourself if it takes a big hit, but you’re also not left behind if it continues,” he said.
Read More Traders: Where is the volume?