Friday, June 23, 2006
There are many tried and true rules related to investing and trading in the stock market. One of these rules is "don't try and catch a falling knife." Contrary to this rule is the strategy of buying the dips. Buying the dips seems to contradict the rule of avoiding falling stocks, so which is it? Well, the answer is that there is as the Ecclesiastian noted, there is a time for everything. Buying dips at the end of May certainly turned out to be the wrong thing to do as the month of June started out with a waterfall-type slide that crushed the bulls. Now the major indices have returned to the downward sloping resistance line that turned stocks back early this month. We are very likely to get another slide back near recent lows. This time we argue however that the time has come to buy the dips. Why? Because there is evidence that smart money is already buying them. Money flow figures have been rising even as the market has been under pressure this week. We are very likely going to get some strong downward moves over the next few days that will shake loose the weak hands, but the way that smart money is now positioning itself we will be looking for a much stronger rally to ensue toward the end of this month. The bottom line is that now is the time to be buying the hard dips and avoiding strength. Use a scaling entry strategy because we don't know where the market will bottom. Recent lows may be tested or the market may bottom slightly lower or slightly higher. Europe is already showing signs that it is ready to move higher. We believe that metals will lead the way in the US markets. Again, don't chase what's going up, but begin to nibble at what's going down.