The Risk Of "Buying On The Dip" In August

Buyers beware because August starts the final portfolio adjustments for Funds, consequently using the strategy “buying on the dip” during this time is a very high risk for losses. Many average investors hear a stock has had a minor selling period and that brokers, gurus, as well as analysts “recommend” the stock as a good buy. This recommendation is based on the stock having dipped from its recent high price. This strategy can be very successful, only if the overall trend of the stock is moderately uptrending over an extended period of time. The “buy on the dip” strategy is a disaster when a stock has weak fundamental or technical support, or it has topped. 

Boeing Co. BA is an example of a stock that has formed a lower high, and is now at risk of forming a lower low technically. From a fundamental stand point, it is experiencing a period of giant and large fund rotation to lower the shares of stock held for Charters or Trusts. As the mutual and pension funds reduce their held inventories of BA, the stock is encountering heavier sell side pressure which makes “buying on the dip” strategy a high risk factor for independent investors and traders.

The stock price of BA of has not yet broken through support but fundamental and technical issues warn it has increasing risk of doing so. In that event, a “buy on the dip” investor would be buying into a stock poised for a significant downtrend as can be seen using a weekly view on a candlestick chart. All companies have their own bull and bear business cycles, which can and do last longer than Stock Market bear markets. Buying as a stock is trending down, can mean that an investor would be holding a stock in a negative ROI for several months to as long as a decade. MSFT is a good example of a company in more than decade long business bear cycle, where the stock remained far below its all-time high which was in the year 2000.

Investors using any strategy for buying a stock must first consider both the fundamental conditions of the company, as well as the technical conditions of the stock. There are companies with solid earnings, yet the stock underperforms. However “buying on the dip” investors and traders must study the stock chart to determine if the downtrend is likely to continue, and where the stock will find fundamental and/or technical support especially when investing in the month of August.

Trade wisely,

Martha Stokes CMT

Source: Nasdaq.com