‘Buy-the-Dip’ Market Strategy Failing Investors
Wall Street tumbled again Tuesday in a sell-off that wiped out the last of the technology-stock rebound that had followed mid-April’s record dive.
Although the day’s decline did not rank among the worst losses in the market’s spring plunge, it may have troubling significance for many individual investors: The slide points up how the long popular strategy of buying stocks on market dips--in particular, tech stocks--has failed miserably since mid-March.
With Tuesday’s 5.9% dive, the tech-dominated Nasdaq composite stock index fell below its close on April 14, a Friday, when it had slumped 9.7% to end its worst week in history.
The Nasdaq, now at a six-month low, has fallen 37.3% from its March 10 peak--eclipsing the 35.9% drop in the 1987 market decline.
What has demoralized many investors is the pattern of the decline: Tech stocks have staged three rallies since April 4, each time pulling in bargain-hunters who believed the shares were certain to rebound to their old highs.
But each time, share prices have quickly reversed, creating fresh losses for those buyers.
That is quite apart from the experience investors enjoyed for much of the last decade, as stock declines, especially in the tech sector, have been short-lived, and soon followed by powerful rallies.
“There’s a shift in psychology going on,” said Arthur Micheletti, investment strategist at Bailard Biehl & Kaiser in San Mateo, Calif. “Instead of buying the dips, at some point people will say, ‘Gee, the next little rally, I’m bailing out.’ ”
If that change in psychology becomes widespread enough, the slow and steady grinding down of stock values and investor confidence of the last two months could give way to an avalanche of selling--and perhaps true panic, analysts said.
With many hyperactive traders sidelined by the tech sector’s collapse since mid-March--after the stunning gains of the previous six months--a new wave of selling could come from mutual fund investors, who have been calm so far but may only be starting to see the damage in their monthly statements, said New York money manager James Awad.
To be sure, the market overall isn’t faring as badly as once highflying tech issues. On Tuesday the Dow Jones industrial average fell 120.28 points, or 1.1%, to 10,422.27. It is down 11.1% from its peak, much less than the Nasdaq’s losses.
Trading volume, including on Tuesday, has been weak overall, indicating there is no wild rush for the exits.
Indeed, some on Wall Street actually would welcome a panic-driven “blowoff,” led by tech stocks, saying it could mark the end of the current bear market for tech shares and perhaps lead to a less spectacular but more sustainable upward move.
For now, though, most investors probably are in between the extremes of panic and bullishness.
In other words, right about where Marcy Evans is.
In the last three weeks, Evans, a part-time legal assistant from Hacienda Heights, bought shares of such tech giants as computer networker Cisco Systems and wireless communications leader Qualcomm. She figured she was scooping up the stocks at bargain prices, and was eyeing other purchases with some free cash.
But Cisco fell from $82 in late March to $57 by April 14, rallied to $71 by May 1, then sank again. It tumbled $4.70 to $50.55 on Tuesday.
Now, Evans is hesitant to jump into the market again. She remains bullish long-term, she says, but wants clear signals that the decline is over before she’ll try another round of “bottom-fishing.”
“I don’t want to buy now and have things continue to go down,” Evans said. “I want it to level out and then feel more comfortable about buying.”
But it may be hard to get comfortable for a while, analysts warn.
The Federal Reserve has raised interest rates six times since last June, boosting the key short-term rate it controls to 6.50% from 4.75%. And most economists believe the central bank will vote another rate hike at its next meeting, June 27 and 28, perhaps even a second half-point increase like the one imposed May 16.
The credit tightening--in the name of restraining inflation--has helped push mortgage and credit-card rates to the highest levels in years and has squeezed the supply of cash available for buying stocks. Higher rates also make business loans more expensive and can crimp corporate profits.
All of this tends to work against a recovery in stock prices.
The last time the market recovered from a serious decline--amid the Russian financial crisis in the fall of 1998--the Fed helped things along with three quick interest rate cuts. Almost nobody expects that kind of accommodation now.
Another negative for the stock market is that the “generals” have been battered along with the “troops.” That is, some of the most celebrated and widely held tech stocks are among the biggest losers lately.
Such favorites as Microsoft, Yahoo and Qualcomm are down 47%, 52% and 60%, respectively, from their peaks--steeper drops than for Nasdaq as a whole.
Some analysts contend that it is harder to mount a broad rally without the aid of such visible leaders. Nor do the old-line blue-chip stocks seem likely to lead the next charge.
Although certain non-technology sectors--oil, insurance and tobacco, for example--have held up well during the recent turmoil, the broad market’s performance has been lackluster. The Standard & Poor’s 500 index fell back into official “correction” territory Tuesday, down 10% from its peak.
But the toughest obstacle to a new rally may be a change in the buy-on-the-dips psychology.
In the aftermath of the Asian financial crisis in 1997 and the Russian economic meltdown in 1998, the overall buying of stocks by individuals acted as a brace for the market that counteracted the selling done by professionals.
But now that many small investors have lost money buying the first dip--not to mention the second and third dips in tech stocks this spring--experts fear that individuals will no longer have the courage to stick their necks out.
“As [the market] goes down more and more, people become discouraged,” said Jeremy J. Siegel, a finance professor at the University of Pennsylvania’s Wharton School and author of the bull-market bible “Stocks for the Long Run.”
“If confidence in that strategy is sufficiently shaken, it could lead to far more declines than we’ve seen so far.
“A strategy that they could smile about and tell their friends about and that had always worked, suddenly doesn’t,” Siegel said. “It could be a blow to their whole psychology of buying equities.”
Jim Little, a Tampa, Fla., investor knows how it feels to buy stocks all the way down.
Several times in the last three months, Little has been convinced that tech stocks had seen their worst days--and each time he jumped in aggressively for fear of missing the bottom.
Making matters worse, he borrowed heavily--a practice known as buying on margin that has amplified his losses. The result: His investment portfolio has shriveled a heart-thumping 95% since February.
“If I’d stopped buying the dips three weeks ago I’d be OK, but I’ve continued to do so,” Little said. “That’s how I’ve lost 95%.”
Despite the danger that he could run out of money, Little pledges to continue to buy stocks on weakness. That’s the only way he can recoup his losses, he reasons.
“I keep saying, ‘OK, it’s got to start back up here,’ ” he said.
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Nasdaq’s Slide Continues
The Nasdaq composite stock index, dominated by major technology stocks, tumbled 5.9% on Tuesday to 3,164.55, its lowest level since November. The index has plummeted 37.3% from its record high of 5,048.62 reached on March 10, a loss that exceeds the decline in the 1987 market crash. Daily closes and latest:
Tuesday: 3,164.55
Source: Bloomberg News
