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Buy the Dips
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Stock prices tend to move as a group, which causes the stock market to
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fluctuate. The market virtually never moves in a straight line. The stock market moves as anticipation changes, based on reactions to economic developments. Although in 1929 the market stayed down for four years, and in 1977 it stayed down five years, most market declines are more short term. Many last only four to six months:
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For 10 straight years, every time the stock market has taken a hit, you ve made big money if you jumped in with both feet. A buy the dips philosophy has outperformed any other strategy imaginable.
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James Cramer, who has been a renowned hedge fund manager on Wall Street, goes on to say how the one exception to this was the market crash of 1987. But the biggest difference between then and the 1990s is the fact that interest rates were rising in 1987. Notice that Mr. Cramer talks about the stock market taking a hit, not the individual stock. Dips caused by market declines are usually the most profitable; however, individual companies can have temporary setbacks that are resolved and the price recovers and climbs to new highs. When the dip is caused by market pressure, the reason why isn t so important. When the dip is just the individual stock, the reason why becomes extremely important. Find out why the stock price is down and what needs to happen for it to recover.
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PART IV Trading
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DIPS ON MARKET PRESSURE
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A look at the price of Federated Department Stores in Figure 32-1 shows some excellent buying on the dip opportunities. Obviously, the price dips of November 2000 and December 2001 were mostly due to market pressure. However, the most recent price dip, in February 2003, was not caused by a declining market. Sales were off and the company went through some strategic realignment, a situation worthy of further study. Buying any one of the three dips would have resulted in virtually a 100 percent gain. That can be simple market timing, which pays off handsomely.
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SELLING ON THE RALLIES
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Buying on the dips can be used by the short-term speculator or the longterm investor. Some speculators follow a strategy of buying on the dips and selling on the rallies. Obviously, the ideal stock for this trading is one that tends to fluctuate on a regular basis
FIGURE
32 1
Federated Department Stores and Dow Industrial Average, April 1999 April 2004
$60.00 Dow Industrial Average Federated Stores NYSE: FD 12,000
$55.00
11,000 $50.00 10,000 $45.00
$40.00
$35.00
Not stock market pressure
9,000
8,000 $30.00 $28 $25.00 $24 $20.00
01 9 00 2 00 03 r-9 9 -0 1 03 03 2 Ju l-0 ec ar -0 ay Fe bJa nJu nAp Se Au ov ct Ap M M O D N r-0 4 p9 0 g0
7,000 $26 6,000
Buy the Dips
BUY STOP STRATEGY
All of the dips shown in Federated s price are caused primarily by market corrections. As we said, a speculator buying on these dips could have profited nearly 100 percent. The major difficulty with such a strategy is knowing when to make the move. A possible strategy, once the price drops, would be to place a buy stop order (on exchange-traded stock) above the current price. That way the buy wouldn t be made until the stock moved upward. The stop could be lowered if the price continued to drop. A limit placed on the buy stop could give protection from an extreme upsurge. The dips here could also be good for long-term investors. Price weakness, caused primarily by market weakness, can provide excellent opportunities to add stocks to a portfolio position.
IT S A NO-BRAINER
To buy stock on price dips is a sound strategy, especially when those dips are caused by stock market corrections. Certainly, the stock market might keep correcting and enter a bear market, but this is not what usually happens. Most corrections stop quickly and the market recovers. Individual stock prices that are influenced by the market create buying opportunities for both the speculator and the long-term investor. These opportunities do not usually last for a long period; therefore, the investor should have targets analyzed and selected in advance to move swiftly.
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