Stock ETF Volatility: Buy the Dip vs Sell the Rip
Following a panic selloff to start the week, opportunistic investors decided the selling was overdone and scooped up beaten-down stock-focused ETFs, as the market proxy SPDR S&P 500 ETF Trust (SPY) erased most of Monday’s losses within two trading days.
The market malaise began Friday when investors learned that U.S. employers added 114,000 jobs in July, far fewer than economists had expected, while unemployment jumped to 4.3%, elevating concerns of an impending recession.
Before Monday’s opening bell, investors were greeted coldly with a rate hike announcement from the Bank of Japan, signaling the end of the so-called “carry trade,” a strategy of borrowing money cheaply in one currency to invest in higher-yielding assets in another.
The combination of bad news created what some analysts dubbed a “Black Monday” event, as investor sentiment turned negative, sending risk assets sharply lower and fixed income higher.
Tuesday brought a positive bounce higher for stocks as dip buyers outnumbered the sellers. The bullish momentum carried into Wednesday morning as SPY had nearly erased Monday’s selloff, only to give back those gains in afternoon trade.
What happens next is anyone’s guess, but a continuation of volatility appears certain.
Buy the Dip vs Sell the Rip vs Buy-and-Hold
This week’s trading action illustrates the dichotomy between bullish investors and bearish investors. Both sides have reason to believe their perspectives will prevail in short-term market movements. The dichotomy also illustrates the differences between the opposing strategies of “buy the dip” versus “sell the rip.”
The buy the dip strategy involves purchasing an asset when its price declines, anticipating a rebound. Sell the rip is the opposite, selling an asset after a rapid price increase to capture profits before a potential decline. Both strategies aim to profit from short-term price fluctuations.
The bullish dip-buyers can claim recent weak economic data, such as higher unemployment, are short-term anomalies causing oversold market conditions, while the bearish sell-the-rip investors can reasonably claim that the economy has been slowing for months and potentially headed for recession.
Perhaps neither perspective is “right,” and the ultimate winners will be traders who successfully execute both strategies and the buy-and-hold investors who ignore short-term noise and volatility while continuing to maintain a long-term outlook with a diversified portfolio.