Published May 17th 2022

Daily Brief - How do you “buy the dip”?

“Buy low, sell high” is the time-honored truism often handed out by bruised market veterans to wrap up annoying investment conversations. Beautifully simple, it’s “anything but” when it comes to following it.

Part of the problem, of course, is that amidst falling stock prices the news is by definition doom and gloom, and contrarian instincts are not natural for most investors. Is timing the market a fool’s errand? Deep down, most investors suspect it may well be but it doesn’t stop them from trading anyway.

The hesitancy to buy this particular dip in global stocks is real. Whether it’s concern that the Fed isn’t going to save the day or the depth of the uncertainty hanging over the economy, many investors see more pain ahead even as they prepare for better days.

How can you decide for yourself?

There are three different ways to assess the market: technical picture, business fundamentals, and the macro context. The best investors often consider all three.

Reading the chart

Unlike fundamental analysts, who try to determine asset value by studying financial or economic factors, technicians examine chart patterns, and trading volume and other statistics to identify likely turning points.

So far, this dimension has been unequivocally negative for the prospect of a market bottom. There is no evidence of improving “breadth”: a “meaningful contraction” in the number of stocks hitting new lows. or a notable increase in the percentage of stocks trading above their 50-day or 200-day moving averages. Any chart support - yes, this really is just looking at the picture - seems a long way off, too.

Below, 50-day and 200-day trendlines have often been sources of support for selloffs.

spx moving averages may 2022

From a technical point of view, rallies will likely be short lived.

How about fundamentals?

On a fundamental basis, despite a healthy expected uptrend in earnings, the multiple suggests S&P 500 is not cheap. It’s not.

Sure, it’s cheaper than it was just weeks ago but it is not historically undervalued. Below, as an example, is the Shiller PE. This metric - rather than attaching a multiple to a single year - attempts to smooth out the year to year business volatility by looking at a 5-year average. As you can see, we are well off the highs (or dot.com-like multiples) but it’s not a screaming buy.

On this score, too, the market isn’t a screaming buy.

black tuesday black monday graph

Don’t disregard the macro

Finally, there is the macro. The path here goes straight through inflation and the Fed: anything that shows inflation is definitively peaking and lets the Fed off the hook would ensure markets start hoping for goldilocks - low inflation and solid growth. Said differently, we are looking for peak “hawkishness.”

Inflation actually HAS come off the peak pace but it’s too widespread to magically drop back to 2%. One way to quicken the pace would be a considerable drop in energy prices. An obvious - and perhaps only - way to achieve that is a peaceful resolution to the Ukraine-Russia conflict that could push energy prices down.

Finally, a non-inflationary one: China ending its Covid lockdowns and opening the stimulus spigots to stabilize its economy. That, too, could boost animal spirits in emerging markets though also likely push energy prices to new highs.

Macro, on balance, also remains a negative impact on the equity market

Idea Spotlight: Equity Residential

Equity yield indicators for Equity Residential reached a recent low and historically, this led to a median increase in price of 7.28% over the following 3M. TOGGLE analyzed 19 similar occasions in the past to produce the median projection and this insight received 5 out of 8 stars in our quality assessment.

The stock could see a higher rebound after reporting a big increase in earnings, as apartment demand remains strong.

equity residential price history

Daily Brief - How do you “buy the dip”?

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