When to buy the dips

Founder and Publisher of the Switzer Report
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Okay, let’s get fair dinkum. Things are not looking great on the stock market and we’re all feeling the pain. But what do the experts say long-term investors should do?

That’s simple; they say buy the dips! Well, right now is what the dips look like.

We’re being dominated by Europe’s procrastination about resolving the Greek bailout and European bank exposure problem. But when it finally gets resolved, what will we have left?

Try this for an optimistic take:

  • A better-than-expected US economy with the recent run of data pointing to no double dip recession.
  • US company earnings possibly could come in better than expected, and I reckon they will be on the strong side.
  • US companies have a record US$2 trillion of cash on their balance sheets, which eventually will have to be put to work.

Right now the market isn’t trading on fundamentals, but fundamentals will win out in the long run. This is the convincing argument that Robert Froehlich, Executive Vice President and Chief Investment Strategist for Wealth Management at The Hartford, put forward on CNBC recently.

Sure, the critical decider will be the health of the global economy and my guess is Europe will be weak, the USA will be stronger than expected, China will again surprise to the high side and the rest of Asia will deliver reasonable growth.

In a sense, the worst-case scenario is being factored in by stock markets. But we might only get a slightly negative scenario and that sets us up for a big market rally.

We need a catalyst and that can only be Europe coming up with a credible, united approach to managing Greece as well as any other European Union member struggling to meet its debt obligations.

I think better-than-expected US company earnings could be another catalyst and if we put these two together, then it could send stocks up – big time.

Froehlich recognises the unemployment challenge in the US, but he thinks productivity will win out over people and so he is currently favouring tech stocks. However, it all depends on an uptick in the global economy.

Many central banks have been raising interest rates – and that’s a good sign that economies are repairing, although the European Central Bank has jumped the gun and a rate cut is coming. This will help Europe and the global economy.

So can we rely on Europe to come through?

Seth Waugh, the CEO of Deutsche Bank Americas, says the EU has the willingness to fix the problem. He says the market wants the “immediate gratification” of a quick solution like we saw in the US after Lehman Brothers failed. The problem is that with 17 countries involved in Europe, it’s going to be slower.

“We don’t fear the bailout won’t happen, but the time could be the issue,” he said to CNBC. “Greece is different from the rest of Europe. Ireland now has positive growth.”

He made the point that if “the sovereigns are fixed, then the banks will follow.”

“Until we get some resolution out of Europe, the market’s going to keep bouncing back and forth,” Alan Valdes, director of floor operations and VP of trading at DME Securities said. “I don’t see any change in volatility either.”

And while volatility is here for some time, there will be a turning point from basically down to trending up.

That’s why I will be buying the dips. And to back that up, take a look at this from a US expert with a great track record: “We hope to become manifestly, aggressively, stunningly bullish of equities,” Dennis Gartman, hedge fund manager and author of The Gartman Letter, said in his Monday commentary. “Until then, we are sellers of rallies.”

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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