Buy the Dip… Or Sell The Rip?

Hey 5-Star Trader,

This year, we’ve seen a significant amount of volatility, and at this juncture, most sectors and indexes remain in a bear market. However, over the course of the past two trading days, we have seen the indexes bounce, and key mega-cap stocks like Microsoft (MSFT) and Apple (AAPL) have begun moving higher. Apple traded higher by 4% on Monday, May 23rd, and Microsoft closed up 3.2%. These moves are signs of hope, absolutely. These are signs that lead investors to ask the next obvious question which is, “Can we buy the dip?!”

But, I want to caution investors against using the terminology, ‘buying the dip.’ Why? This phrase is meant for a bull market. One in which investors regularly identify 5-10% moves lower in which we could load up again on a ‘discount.’ While stocks are certainly on discount, -25% move lower in Microsoft is not the same event as a slight dip in a bullish trend. Right now, we aren’t just in a dip, but standing on the side of an icy crevasse that would be easy to trip and fall directly into.

Despite the dashes of hope we are seeing, I don’t believe a bottom is in. There is nothing wrong with averaging into long-term stock positions, especially in mega-cap names that’ll most likely survive this downturn, but that is significantly different than ‘buying a dip’ in a bullish market. 

Check out the daily chart below for some relative strength and weakness comparisons:
Phoenix Finder Turbo – Big Picture

Click image to enlarge.

On the Phoenix Turbo, you can easily see which indexes and sectors have been hit the hardest, and which are holding relatively steady. Currently, right now, the Nasdaq is the weakest link as it relates to the indexes, and it’s down -28% from all-time highs. The S&P 500 barely missed a long stay in a bear market (so far) and is down -17% from all-time highs.

Using the comparison grid, you can see that despite the carnage in housing (XHB), cloud computing (SKYY), semiconductors (SMH), and cybersecurity (HACK), the relative strength areas of the market, energy (XLE) and healthcare (XLV) remain stable and strong.

So, when does the bleeding end?

Right now, I’m sticking with riding the trend, whichever way it goes. Almost all year, that trend has been to the downside. I am focusing on weak trends, in the weak sectors. This could potentially change if something major happens, for example, if the Federal Reserve changes course. But until then, I’m looking for capitulation. I’d be surprised if we could find a low without any limit down days, a VIX spike above 40, major margin calls, and investors and funds just hitting the sell button on everything to get out at any price. 

To me, the selling has been regular and steady, or in Powell’s words, ‘orderly,’ but there hasn’t been that final kick in the can. I have felt like we are close to it for some time, but it just hasn’t happened. That’s why I’ve been hesitant to buy because making a real low without that capitulation is unlikely. The thing is, we are through most of the landmines we have discussed, including being almost through May seasonality, most earnings, the May Fed meeting and talks proceeding the June Fed meeting, and it seems like there isn’t anything major that could be a surprise at this point. Of course, that is why surprises are called surprises! I think the selling has been steady and we haven’t seen capitulation because we haven’t seen a true shock. 

So, until this changes, I am going to continue to focus on relative weakness, or as I like to call them, the Canaries in the Coalmine, which I’ll be discussing this Wednesday, at 7 pm CT! Click here to reserve your spot!

What are canaries in the coal mine? These are the sectors and stocks that have fallen the hardest this year are the ones that topped out last summer before the rest of the market took a turn for the worst. Bear market rallies are a great time to come in and short relative weakness because you can get in at a better price. As the market has been unable to mount any kind of sustainable rally, it’s hard for traders to get short at ideal levels. However, if you look for the weakest links, what I like to call the canaries in the coal mine, those are the ones that die out the quickest when the market starts to roll. This is because I call the stocks rising from the ashes first the Phoenixes, like the mythical creature. So, it made sense to name the ones that roll over and die first, canaries! 

Some of the weakest canaries right now can be found in the ARKK Innovation ETF (ARKK). Check out a screenshot of the Phoenix Turbo with my ARKK grid below:

Phoenix Turbo – ARKK Innovation ETF


Click image to enlarge.

As you can see, these stocks are down considerably, especially when compared to additional sectors and industry groups across the market. ARKK is down 68% off of its all-time highs! 

So, why am I looking at this ETF?

Well, it’s because it’s loaded with the Canaries in the Coalmine! And, the Phoenix Finder Turbo is lighting up, demonstrating that some of these names are bouncing off of the lows. Some may get excited and think this is a moment in time to ‘buy the dip,’ but remember – buying the dip in a bear market is NOT the same as in a bull market. These stocks have gotten destroyed, and they will rally at times, as bear market rallies can be ferocious! But, that doesn’t mean it’s time to buy. Most often, Phoenix will alert that it’s in fact time to sell the rip.

How can a trader tell?

Well, it can be hard to remain objective in the market, but that’s why I like to lean on tools that give me very objective signals and information. That is what helps me drown out the noise, and attempt to stay on the right side of the trend. It’s using this methodology that has lead me to stay on the short side for the majority of the year, and, it’s what will show me that the situation has changed if and when it’s time to shift to the bullish side again.

Want to learn more? Join me at 7 pm CT on Wednesday, May 25th where I’ll talk about my top tips and tricks for trading a bear market, my favorite objective signals and explain how I’ve identified directional moves and traded them in this bear market and more! Click here to sign up.

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