Learn to adapt to new environments
When to buy dips and when to sell rips
Hello everyone,
When studying market history, we can see long stretches (eg. 10-20 years) when one region, asset, or style outperforms. No bull market lasts forever, but there’s always a bull market somewhere. Whether it’s US vs. Non-US, growth vs. value, or stocks vs. commodities.
I’ll mention again this excellent 100-year chart from @murphycharts :
In the early years of a new regime, many are skeptical of the new leadership. They’re still interested in forcing trades in old leadership. Then, in the advanced stages of the regime, they finally embrace the new narrative and pile in. The cycle repeats.
Let’s look at some examples.
By year 2000, the S&P 500 (SPX) had been in a phenomenal 18-year bull market in which it gained over 15x without including dividends. A year earlier, I remember working a job during my senior high school year at a local pharmacy. The pharmacists and techs would constantly check the price on the Nasdaq. I could see there was excitement in the air and all the grown ups with money were long.
Then began a brutal 13-year bear market in which the SPX got cut in half on two separate occasions. Josh Brown mentioned in one of his podcasts that he was foolishly buying every dip in tech during 2000-2002.
In 2013, SPX quietly broke out of a 13-year base. There just wasn’t any mania this time.
To mark the new ATH’s, I remember JC Parets had this epic tweet:
Unfortunately, I was still fighting trends back then and ignored the new regime. Instead, I was still trying to ‘buy the dip’ in gold miners and not accepting that gold’s 10-year bull market had already peaked in 2011. I was stuck on the gold bug narrative. Like Josh, it took time for me to learn not to fight trends. 🤦🏾♂️
And it wasn’t just me. The general public was still scarred by the 2000’s bear market for a very long time. When SPX suffered a correction from 2015-2016, many were calling for the start of a new bear market. Yet the market came roaring back in late 2016. Thankfully, I had discovered trend following by then to have participated in that rally.
The general public didn’t really begin to show interest in stocks until about 2017 when we had the first real mania of the bull market. It was the first time in my life that I began getting texts from friends about stocks (specifically weed) and crypto, which is really just stocks on steroids:
The ‘17 mania suffered a correction, but the market came back. We then had a global pandemic and economic lockdown, but guess what? The crash lasted 3 weeks before the market came roaring back – yet again.
12 years of the market bouncing back each time has conditioned us to ‘buy the dip’ in stocks. The “Fed put” they called it. But what if that no longer works now? Because stocks have entered into a downtrend this year:
Yet, ‘buy the dip’ is so ingrained in everyone now. People are still throwing money at old leadership. A new generation is repeating an old mistake.
Just look at the flows Cathie’s ARKK fund is still getting:
What’s doubly interesting is – the opposite mentality exists for commodities. From 2007-2020, commodities have been in a downtrend. In that environment, its paid to “sell the rip.” But what if that too, no longer works?
Just like SPX made a major breakout in ’13, many oil stocks made similar multi-decade breakouts within the last year. What if commodities are now a ‘buy the dip’ market?
Today, nobody I know of personally is buying oil stocks. They’re all still forcing trades in tech. This tweet summarizes things very nicely:
That’s all for this week! If you found this post useful, please give it a like and share. Thanks for reading.
Twitter: @alphacharts.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.