Image Source: Unsplash

It has long been said that there is nothing certain besides death and taxes. In this current market environment, I think there is a third element: every dip will be bought.

I am being facetious, but only to a point. Because of the tendency for stock indices to rise over time, “buy the dip” is a strategy that has withstood the test of history. With most major indices at or near all-time highs, it stands to reason that over time if investors bought every significant decline, then it would have worked out for them. Unfortunately, not everyone has unlimited funds to keep investing, and no one is blessed with an unlimited time horizon. The rest of us have typically needed to be judicious about when to time our decisions when to buy fallen stocks or the market as a whole. 

But that judiciousness has not really proven necessary recently.In the nearly three years that the current bull market has been in effect, most declines have been short-lived and relatively shallow.The freak-out that followed the Japanese carry trade blowup last August was abrupt, but quite short-lived.The tariff tantrum in April was deeper and more prolonged, but it was ultimately resolved in a relatively quick manner and easily put in the rear-view mirror (at least until last Friday). Those once again reinforced the mindset that every dip offered a buying opportunity.

In recent weeks, that seems to have been taken to an extreme.We have contended that the “half-life” of dips has been steadily shrinking because buyers who have understandably been conditioned to buy dips are stepping in more quickly.That means that selloffs have become shallower and resolve themselves more quickly.We have even posited that traders are becoming less likely to sell, figuring that it makes little sense to do so if the market is going to rally again anyway.If the market will be higher tomorrow or the next day, there is no point in selling today, right?QED

That works if everyone has unlimited funds and timeframes. As noted above, no one does.If you’re investing for a retirement that is 30 years away, then yes, your timeframe has proven long enough to ride out even prolonged bear markets.That’s not the case if you’re planning to retire soon or are investing for a specific need, such as buying a home or paying for college. 

Alternatively, if one has unlimited sources of funds then one could of course put some of that money to work buying every dip.But even the wealthiest investors run into constraints, particularly if one is already fully invested.New funds are required to both sop up stock that is for sale and to push stocks higher.One way that fully invested traders and investors achieve that is via margin.Trading and investing with margin can magnify one’s gains but also magnify losses.It can be a great tool when markets are rising but can turn ugly when they pull back.That can lead to forced sales and financial catastrophe for users, which at its worst, can amplify selloffs.It is not for everyone!

We bounced yesterday after the President softened the tariff and trade rhetoric that shocked markets on Friday.That was quite understandable given the magnitude of the downswing and the nature of the news flow.This morning, we woke up to news of fresh tensions, but traders were able to shrug off the worries and began to push stocks higher after the selling abated.Once that latest round of dip buying took hold, stocks moved up in a nearly straight line.They were flirting with unchanged levels when Powell began to speak, then traders were clearly encouraged by his preliminary comments.Once again, the dip buying proved fruitful.

Let me leave you with one inconvenient thought, though.It is very difficult to know if a wave of selling is part of the normal flow, a rogue wave, or a shift in the tides.So far, the tides have been flowing in one direction, with the oddball rogue wave.Can we always assume that will be the case?

More By This Author: