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Investment Strategy

Buying the Dip

By Elliott H. Gue, on Jul. 3, 2015

At the end of June 2015, the S&P 500 slipped to its lowest close since late March, right at the lower bound of the 2,050 to 2,140 trading range that we highlighted in the June 15 issue of Capitalist Times Premium. (See What Lies Beneath.)

Although the S&P 500 remains within 5 percent of its all-time high, only 43 percent of the stocks on the New York Stock Exchange (NYSE) trade above their 200-day moving average—down from about 51 percent a month ago and 60 percent in April 2015. Market leadership hasn’t been this narrow since late 2014, when the S&P 500 suffered a 10 percent correction.

(Click graph to enlarge.)NYSE Stocks 200-Day Moving Avg

Over the past five years, the proportion of NYSE-listed stocks trading above their 200-day average has slipped to less than 40 percent of the market from more than 50 percent on four occasions.

Investors who bought the S&P 500 when this technical breakdown occurred would have booked a positive three-month return in three of these four instances—an average gain of about 7 percent. Over a six-month holding period, the average profit increases to 12.6 percent.

These technical indicators suggest that this summer’s best buying opportunity will occur when market leadership narrows even further. Meanwhile, the 5 percent to 10 percent correction of which we warned in recent months finally appears to be underway. (See Looking for a Pullback.)

Surprise, Surprise

Ironically, the stock market’s breakdown coincides with improving US economic data.

The Bloomberg US Economic Surprise Index compares economic data points from the past six months to analysts’ consensus estimates, with the most recent releases receiving a higher weighting.

When the index climbs, the US economy consistently surprises to the upside; a downtrend indicates that these numbers have failed to live up to the market’s expectations.

(Click graph to enlarge.)Bberg Econ Surprise Index

The Bloomberg Economic Surprise Index tumbled to a low of negative 0.873 in May 2015, another signal that a buying opportunity was at hand; as we explained in Great Expectations, pullbacks to less than negative 0.6 occur relatively infrequently and mark a solid buying opportunity for a six- to 12-month holding period.

Many of the technical indicators suggest that investors should take advantage of the recent dip and any further downside to add to or establish positions in our favorite stocks.

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