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Is It Time to “Buy the Dip” in US Stocks?

Billy Toh

January 27, 2022

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Over the past few weeks, the violent sell-off has put global stocks on course for their worst start to a new year in a while. It’s not showing any signs of slowing down either.

In fact, if you look at the MSCI ACWI Index, which covers approximately 85% of the global investable equity opportunity set, it’s down by about 7% so far in January alone.

It is worth being mindful of the fact that the volatility we are seeing in the market at the moment is mainly due to the late cycle fears of rising rates and yields.

Tech stocks take a hit

Once the darling of the stock market, technology stocks are now the worst-hit sector as investors grow increasingly cautious about growth stocks as they brace for the rate hike cycle.

Tech stocks’ high valuations is one of the main reasons for the heavy selling.

In fact, the tech rout has sent valuations tumbling to their lowest level since the early period of the pandemic. Despite this correction, valuations remain higher than the average over the last decade.

Technical indicator shows oversold level

A look at the technical indicator below shows that US tech stocks are at their most oversold level since March 2020. In fact, the derating of growth stocks may slow as real yields stabilise.

This could point to a good entry point into the tech portion of the stock market but the US fear index or the Chicago Board Options Volatility Index (VIX) remains at around the 32 level (see below), which is a one-year high.

This means that the market remains volatile and that investors are still fearful of the uncertainty over the Fed’s monetary normalisation path.

Source: Bloomberg

Understanding the dangers of dip buying

A ”buy the dip” strategy means buying an asset after it has dropped in price. The belief here is that the lower price represents a bargain as the dip is seen as a temporary blip and the price will rebound back – increasing in value in a short span of time.

In theory, it works as if you are looking at a bargain shop, where you’re buying assets at deep discounts.

However, given the market volatility, there is no guarantee of success and in fact, a down market might persist longer, causing one to sit on losses over a long period of time.

In our environment’s today, there is mixed response on whether it is the right time to “buy the dip”.

While buy the dip works in 2020 and 2021 when we saw a surge in retail investors, it does not guarantee better returns. In fact, there is concern that one might be stuck “catching a falling knife” when trying to buy the dip.

Holistic portfolio approach when “buying the dip”

So, instead of timing the entry level and asking if it is the time to “buy the dip”, one should look at their portfolio when making their investment decisions.

For example, a new and young investor would find the entry level into tech stocks to be at a more attractive level than what it was towards the end of last year.

However, for an investor who is looking at retirement soon (ands needs to safeguard his or her initial capital), a rotation towards value stocks might make better sense.

My colleague Say Boon has written on where the opportunities are during the market turmoil that we are seeing today.

I think it’s a good guide for investors, especially those who have exposure in the market right now.

So, the next time you ask if the market is at a low enough level to “buy the dip”, the right answer to that lies in your existing portfolio allocation.

About the Author: Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.