Here's Why Dip Buyers Will Get Demolished
A bear market is defined as a market condition in which shares fall over 20% in multiple broad market indexes over at least a two-month period. On the contrary, a correction lasts for duration of less than two-months. In case of a bear market, prices of securities fall at a rapid rate and widespread pessimism causes the negative sentiment to be self-sustaining.
In such situations, investors buying the dip can lose a lot of money by confusing the bear market with a correction.
Many markets across the globe have already entered bear territory and I expect the U.S. market to join them soon. Corporate earnings in the U.S. have been falling for the past few months and are expected to decline for the third consecutive quarter.
A bull market correction never occurs when earnings are falling. Over the last three quarters, corporate earnings have shrunk considerably due to several factors like strength of USD, declining oil prices, slowdown in economic growth, etc. A correction in a bull market never occurs when earnings are falling, which is why I think the recent selloff will tumble into bear market territory in the coming months.
Back to back quarters of earnings decline have always resulted in plunge of at least 20% in the S&P 500 and there’s no reason to believe this time will be any different. Hence, I think investors buying the dip will probably lose more money as I expect the market to tumble into bear territory. In fact, the market can even enter recession in the coming months.
I have been advising investors to have a net short position in their portfolio for over four months now. Most of my short recommendations have yielded double digit profits in the reference period whereas the market has continued moving lower. Since I expect the market to continue falling due to the reasons mentioned above, I think investors shouldn’t buy the dip and should instead focus on shorting overvalued stocks.
Published on Feb 11, 2016By Ayush Singh