FYI | Aug 19 2015
By Peter Switzer, Switzer Super Report
After a week when our stock market was down over 2%, and we seem stuck near the bottom of our trading range, the question has to be asked: how long can we keep buying the dips to make easy money?
So far this year there has been a May dip, which went from nearly 6000 to around 5600, then another from just under 5800 in June, which slipped to 5420 or so. We then recovered to 5700 in July-August to then see another drop to where we are now.
The pay off
Right now, those previous dip buys put us out of the money if you were playing the index via an ETF, so the jury could be out for you on whether dip-buying has been the right strategy. My view is that it will pay off, so relax.
Of course, if you picked the right stocks, then you should be in the money buying the dips, with CSL being a case in point.
Every dip this year has been below its Friday close price of $93.15 and if you got in on the March dip, when it hit $83, you are up about 12% in four months or so.
Sure, some companies haven’t delivered on the dips but they have generally delivered some unwanted news to the market, with Ansell last week being a case in point.
Regular readers know I have confidence that our market over the year should see the 6000 level, which not only will help dip buyers of the index but most stocks and that’s because, as the old saying goes, a rising tide lifts all boats, though I’d add except those with big holes in their bottom lines!
With someone like Morgan’s chief economist, Michael Knox, tipping a $US100 for oil inside two years, you can’t see his economic model forecasting economic and market Armageddon, so it’s believable that our market will crack the 6800 level over that time, which was the previous high. There is a good historical argument that most stock markets surpass their old all-time highs unless they were bubbles, as we saw with the Japanese market in the 1980s and the Nasdaq in the late 1990s.
I will be a dip buyer until we hit 6800, or until some curve ball comes along to unnerve me. Sure, there are lot of balls being tossed from economies where too much money supply has been expanded to economies/governments carrying too much debt.
There are imponderables from the likes of the confusing control economy of China to the stubbornness of the Japanese economy, which seems stuck in its low growth ways, just like the inflexible Japanese culture itself.
The good news
However, against that we have central banks conspiring to get economic growth happening, so right around the world there are historically low interest rates. Stock markets seldom fall over with interest rates so low and without a succession of rate rises.
We’re seeing promising signs of economic growth in the US and the first big test comes in September with the Fed meeting. That’s when the biggest and most important central bank in the world has to decide whether to raise interest rates or not.
If it does, markets could sell off, but the consensus is that market participants will accept that it’s a sign that the Fed thinks the US is on a growth path towards normalcy. But the word is that the first rise could be smaller than expected and the course of rate rises will be slow. Either way, all this should help stocks and dip buyers.
As long as this happens and the US grows, then markets will crawl higher, with volatility, as we watch for green shoots of growth right round the world.
The macro view
The Warren Buffet purchase of Precision Castparts for $32.3 billion makes me think that the Oracle of Omaha is not seeing Apocalypse Dow in his investing crystal ball any time soon.
I also liked this about China from George Pearkes, an analyst at Bespoke Investment Group in the US, who told CNBC: “Chinese retail sales are growing 10.5% year over year. In the United States, that figure is something like 1.6%. So I just think that this idea that the Chinese economy is collapsing … is ludicrous."
In fact, the yuan was devalued about 3% or so last week but has gone up 80% in two years, so this pullback was pretty moderate and will hardly destroy the US, which has been using a depreciating greenback since the GFC to rescue its economy.
September and October are historically spooky months for stocks and when you throw in the possible US rate rise next month, we could see more stock market dips ahead. However, I will be a buyer and will be doing so until the economic story weakens so much — globally and here — that I’ll start betting that the company stories that rely on better economic growth outcomes are going to make for very bad reading.
I’m publicly confident that we have at least a year of dip buying ahead but privately I’d argue that we’ll probably see two! Of course, if I change my mind, you’ll be the first to know.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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