The markets are down today with the S&P 500 closing at 2,633.08, which is down 4.6% from last Friday at 2,760.17. Is now the time to buy the dip?
If you were waiting for a pullback to pile in any cash you have, the S&P is down today. Closing at 2,633.08, represents a 10.47% drop from its all-time highs of 2,940.91 back on September 21. Depending on your investment philosophy, a 10% pull back might be a mile marker.
Of course this all comes down to what type of investor you are.
If you’re a long term investor and saving for the future and retirement, you’re probably already disciplined and systematic. Dip or no dip, you’re adding into your retirement account using a system of dollar cost averaging. Every paycheck you get you stash away a percentage for the future.
Fortunately I fall into this boat. Since I have over 30 years left before retirement, my portfolio has the flexibility to weather any storms that may hit. And a 10% drop from all-time highs represents not a negative event, but a positive opportunity to add more positions at a fairer price.
I sometimes jokingly tell my friends that if they had bought SPY and delete their brokerage app, they would be still be up today. We have also coined the term “SPY and Chill” as an inside joke. A play on the phrase “Netflix and Chill“.
Recall in one of my previous posts, I mentioned that if you take any 20-year time period within the last hundred years, the market has always been up for that time frame.
Additionally, if you had bought the market top on October 11, 2007 when the S&P was at 1,576.09 right before the financial crisis, you would still be up 10 years later. Because on October 11, 2017, the S&P closed at 2,555.24 representing a 62.13% increase in point action. A point, which I reiterated in this post.
However, if you’re a shorter term investor, this dip may have your palms sweating a teensy bit. Should you buy the dip now? or should you hold? Or sell?
On a technical level, the S&P is pressing up against a resistance level right now at 2,640. And this would be the third time it’s hit that resistance level. However, February and April might suggest another resistance level around 2,560. If it rebounds up from here, that would be a strong argument that 2,640 is a very strong resistance level, since it’s hit it three times without falling through. If the bottom finally falls out, then we may be headed darker into the abyss, and very quickly. It may be wise observe the next few trading days to find conviction of a direction before making a move.
The bottom line is: flip a coin.
The Macro Factor
From a macro level, the most recent market influencing news is in regards to the yield curve. The inversion of the 2-year bonds and the 5-year bonds is a signal that the economy is changing.
This is based off the economic thesis that an inverted yield curve generally means a recession will loom in the future. If the shorter bonds yield higher rates than the longer bonds, then it’s logical sense to lock your money away for a shorter time period.
To illustrate a hypothetical example, ask yourself this:
As a consumer, would you buy a 2-year CD that gives 3% interest or a 5-Year CD that gives only 2.5% interest? It makes no sense to store your money away for 5 years if you’re earning less interest.
The other side to the coin is that borrowing at shorter rates become more expensive. You wouldn’t want to finance the construction of a building for 3% when you could borrow for longer and only pay 2.5%.
Fortunately, we’re not quite there yet since the yield curve has only inverted for the 2-Year and 5-Year yields. The more convicting tell would be when the 2-Year and 10-Year inverts. Then we’re in for trouble.
Buy the Dip?
In conclusion, is it time to buy the dip? As I alluded to before, the longer term investor may have nothing to fear. For me, I continue to dollar cost average down and pick up a few shares periodically for my retirement account. Regardless of where the market is going. The yield curves aren’t quite in danger zones yet and the long time horizon is reflective of stronger risk tolerances. The short term investor may want to observe and see what happens over the next couple of days before determining an execution. The important thing to note is that both types of investors have a strategy and system in place. The most important thing during uncertainty in the markets is discipline.