In the past I have said that, when things are booming, calls to "buy the dip" is one of the least useful
pieces of advice. If the market or an individual stock goes up 10% while you're waiting for a dip, you've missed out, and even if that doesn't happen you still have to determine what constitutes a "dip." Should you buy 3% lower, or 5%, or 10%?
Once negative sentiment has taken hold, however, it is worth reminding ourselves that that has been the plan all along. At that point we naturally begin to question whether the action we're seeing is more than a normal correction, and fear of a collapse will often freeze us into inaction. If the last few days have felt like that to you, then stretch out the time periods of your chart so you can think more logically.
With no more than a cursory glance at the above 10-year chart, I can see around a dozen drops that were, with hindsight, good buying opportunities after the 2008-to-2009 collapse. These include the events that have transpired since Friday. I guess you could say the market is due for a big one, but my trading background makes me more inclined to play probabilities, with reasonable safeguards, than to bet frequently on the possibility of a rare event. That is what we should be looking to do here.
In this case, however, I would add one proviso. In addition to the normal safeguards, such as prudent stop-losses, it may be smart to engage in some selectivity and even a bit of portfolio rebalancing. There is no doubt in my mind that some things have become seriously overvalued in the market's sustained move upward, and it would be a mistake to buy them now, even at what might appear to be bargain prices.
This rally has taken place amid unusual circumstances, as neither the U.S. nor the world economy has been surging. Annual gross domestic product growth of around 2.5% is hardly the stuff of which strong bull markets are usually made -- but, with help from the Federal Reserve, as well as a very low starting point, that is what we have seen. As a result of this, investors have been placing a premium on growth and even the potential for growth.
Amazon (AMZN) would be a case in point. You can call me old-fashioned and out of touch -- but even at a 20% discount to the January high, I cannot get enthusiastic about a stock that is trading at more than 550x trailing earnings and around 110x analysts' forward estimates that have some growth factored in.
It's not that I doubt the wisdom of CEO Jeff Bezos in pursuing growth, nor am I dubious about his ability to achieve it. It's just that I find it unlikely that this company has the potential for the kind of world domination that such a valuation implies. Even given the shift to a more content-driven model and Amazon's success in that field, it seems that the greed of growth-hungry investors has outpaced reality here.
That doesn't mean that there aren't opportunities in tech. I have been banging on about Apple (AAPL) for a while, and any pullback in that stock would look like a good opportunity to buy. There are other, more risky, growth-oriented plays as well.
One example is GT Advanced Technologies (GTAT), which makes scratch- and crack-resistant screens from sapphire. The stock may look as if it has lost all of its value, and it may seem too pricey at more than 70x forward earnings. However, if this company's technology for becomes widely accepted, the estimates on which those forward earnings are based could turn out to be way too conservative.
Still, if I am right, and if we are seeing a fundamental shift to a more realistic attitude regarding potential, GT Advanced shares may first have further to fall -- so buying here would not be for the faint of heart. You may want to stand aside for now, with a view to buying around at $15, or on a break above $20.
So, yes, both Apple and GT Advanced Tech could present opportunity at decent entry levels. In general, though, I would look to use this broader pullback to add more established, traditional value plays to my portfolio. I don't believe this larger move will turn out to be anything more than a correction, but this is probably not the time to be placing a lot of faith in excessive growth expectations. The overvaluation of growth is understandable when a bull market coincides with a sluggish recovery, but the oldest rule of investing still applies: Eventually everything returns to the mean.
Given what we have seen the past year or so, it would be quite possible for that to occur amid continued struggle both in the broad market and among some individual tech, social-media and biotech stocks. Both would be returning to the mean. For that reason, while you should remind yourself to buy this dip, just like any other, it may be a wise move to avoid stocks that exploded last year based on growth expectations rather than actual profit.