Wednesday, August 12, 2020

Buy the Dip (reminder)

Buy the dip. At least in stock markets. But why?

This advice is certainly not sound all the time but has some merit to it.

Markets go up, 75% in time, way more often than they go down, 25% in time. Governments and Central Banks have a stake in the markets (wealth effect & inflation). They will do everything in their power (monetary and fiscal policies) to either stabilize markets or propel them higher. And people in general are more naturally inclined to optimism (greed or fear of missing out) than to pessimism (fear of loss). And of course one of humanity's main endeavours is to increase wealth (market capital & dividends).

Also bears (swift, violent and erratic) are much more difficult to ride than bulls (slow, mild and grinding).

So it pays to be bullish more often than not. I normally stay bullish as long as price remains above the 8 day EMA. I only turn bearish when price initially moves below the 200 day SMA and I remain so until price moves above the 8 day EMA again.

If markets consolidate, correct or enter bear market territory it is usually a good idea to start thinking about the levels at which you want to add to stocks held in your core portfolio. The one you hold for the longterm. So see it less as a threat and more as an opportunity. Hopefully helps to ease the pain and anxiety associated with loss of existing value.

I do not trade or invest according to these views. For that purpose I only use the Trend Trade & Investment Strategies which are explained at the bottom of this blog. Please also read the disclaimer there.