Weekly Update September 5th

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Freaky Fractals

Hey folks, thought I would kick us off this week with a nice bear post and I’m specifically looking at the similarities from 2008.

In the first image, we have the PA today… Not a pretty picture.

The second image is from 2008…

It’s a bit eerie how similar these charts are, specifically from the first bubble I’ve drawn – Almost following it identically.

What happened next? Really ugly…

For this to play out like 2008 I think we need some sort of black swan. In 2008 the mortgage crisis was a bit unexpected, whereas today much of the risks are known so we require an element of surprise if we are to play out like 2008 IMO.

What could this ‘’unexpected event’’ be?

Current risks:

Fed fucks up – Probably the most likely scenario – They tighten too much and jobs/credit spreads start to blow up. FYI credit spreads have just crossed the last peak in June – now setting new local highs.

Fed fucks up 2 – They tighten too little and inflation remains persistent/sticky – causing stagflation.

Russia kicks it up a notch – Quite likely I think given the current move to cut further gas to the EU, this could escalate further and further and further….

Taiwan – China invades and the US retaliate – Again I think quite a likely scenario

Consumer credit blows up – As we know the consumer is under a mountain of debt and on the cusp of job losses this could cause a HUGE default across the consumer market, businesses go under, people lose homes, and spending is almost non-existent.

Extreme civil unrest – I think again a fairly high scenario, particularly in Europe where food/energy prices are going to be rising higher. We’ve seen unrest in less developed nations with sky-high inflation and this could quite easily spill over into other places.

Some black swan unknown to us yet – Plenty is going on above and typing out the scenarios and looking back at them I think there’s a high probability on most of them and I don’t know how these things could develop, triggering an ‘’unknown’’ event.

My plan here remains unchanged… I think Powell continues until things start to break and I’m focussed on the Job market / Credit spreads for this. Once these start to show real signs of breaking – leading to systemic risks that’s when you start to deploy the heavy bags.

On the Agenda this week:

Tuesday – US PMI DATA

Wednesday – EU GDP, FED speakers

Thursday – ECB Rate decision, US Jobs, Pow Pow speaking

Friday – US Wholesale inventories

Not a huge week really – Next week is the week where it all happens. We have CPI out on the 13TH and then we have a HUGE open on the 16th. Both of these things could have drastic effects on the market. 

How many times did you hear “Buy The Dip” or “Sell The Rip?

Even if you’re a newbie investor, you’ve likely heard those terms many times. Something similar could be quoted from Warren Buffett, “be greedy when others are fearful, and be fearful when others are greedy.

Some of the most recent and resonant “buy the dip” events are associated with El Salvador president tweeting it every time they purchase Bitcoins.

Let’s have a look in detail at those two commonly used terms and get to the core meaning, and whether they’re good strategies to apply. 

What Does Buy The Dip Mean?

At the moment investors say they are “buying the dip,” which means they’re buying an asset after its value has gone down, or has dipped.

As prices dip, some investors see that as an opportunity to buy a certain asset at a discount, thinking about how that will increase their future gains when (but, really if) the asset price rebounds to previous highs — and beyond. 

There are a lot of people that think about buying the dip as a reaction to short-term price movements. Therefore, buying the dip is not a recommended strategy for long-term investing unless it is part of a DCA strategy (we saw that in a previous entry).

It differs from the buy the fear philosophy of long-term investing guru, Warren Buffett, who prefers to buy when there is a major sell-off, not just a single red candle on the chart.

Then what does Buy The Dip Sell The Rip mean?

This phrase is mainly directed for short-term trading to express buying when the market dips and selling fast when the market bounces.

Is Buying The Dip A Good Idea? 

Several factors influence whether buying the dip is a good idea. Like any investment and trading strategy, buying the dip has its unique set of pros and cons.

The pros of buying the dip include:

• You can lock in a lower average cost for your assets.

• Buying the dip is comforting because you have the satisfaction of knowing you didn’t buy the top or “rip”.

• A high potential for profitability once/IF the stock price rises.

The cons of buying the dip include:

• Very hard to predict in advance — especially the dip’s magnitude.

• There’s no guarantee the asset’s price will recover above your buying price.

• You may miss out on further gains if the price doesn’t drop as expected.

• Hard to use with a good risk management strategy, easy to incur heavy losses.

Is Buy The Dip Sell The Rip A Good Idea?

With the pros and cons in mind, specific types of traders might find the “buy the dip” strategy attractive.

Prime candidates are investors who are:

-Very high-risk tolerant.

As you can tell by now, trying to make meaningful profits over a short period in a very volatile and ruthless market comes with its fair share of risks. The best candidates for this strategy are investors who aren’t afraid to take some losses on their hunt for treasure. Buying the dip can also be known as “catching falling knives”.

-Skilled in Technical Analysis

The process of analysing price action chart trends to determine where an asset's value is headed is known as technical analysis. They use tools and indicators such as support and resistance to identify a theoretical range where the price should oscillate. 

Candidates who are best suited to buy the dip have a deep understanding of technical analysis and can use it to make fast-paced market decisions.

-Don’t Care About Income from Investing

Since buying the dip is such a fast-paced process, investors who use the strategy rarely hold an asset. This strategy simply doesn’t fit the bill for long-term investors who depend on their investments for income, such as APY.

Conclusion

In a nutshell, buying the dip is a strategy that relies on predicting future price movements. If you can perfectly time the market and buy shares at a low price right before they increase in value, you can earn a pretty penny. But, timing the market is no easy feat, and investors are just as likely to buy and have positions that keep falling rather than ones experiencing a mere price dip. Always remember that there is no certain future, always be prepared to be wrong and be able to cut your losses early the same that you might let your winners run.

If you’re a seasoned, confident trader,  buying the dip may be worth your efforts. But for other investors, a simple, longer-term strategy is likely to be a more wise investing choice.

Don’t forget that there is a golden rule above them all: the CAPITAL PRESERVATION. Multiple risk management strategies will help you stay in the game long enough until you make your goals, and prioritise that at all times. Especially when buying the dip! 

One of the best practices is to be a balanced trader/investor where you can “buy the rip and sell the rip” in the short term, while you look for some DCA long-term positioning and stay diversified to reduce your exposure and risk.