Should I Buy the Dips?
Research for Onine Investors

by John Dalt

6/8/10

Is it time to “Buy on the Dips?”  The question begs an answer, as many have done well over the last year buying on market pullbacks.  But the answer may depend on your time frame.  Are you a trader or an investor?  How much tolerance for pain do you have?  If you have practiced this technique for the last month and a half, you have been punished for your efforts.

The sea change to your strategy is projecting where the market will be in six to nine months.  The market looks to trade in a declining channel from now until earnings season starts in July.  We don’t see where the good news will come from to change the skittishness investors are feeling right now.

On January 4th, 2010 we predicted that the S&P 500 would close the year between 1200 and 1400.  This may have been optimistic, but as the market advanced in April it made us nervous.  The market had reached our lowest target for the end of the year!  This was crazy, to think every problem was behind us and we could return to pre credit crisis valuations so quickly.

Beginning on March 6 of last year, you could buy almost any stock, and if you held it long enough, make a profit.  In the words of an old friend, “Inflation covers up a lot of mistakes.”  When the market is on a bull run to almost doubling in value, a monkey can pick stocks and make a nice return.

You better not try that now.  The market is dancing right above resistance of 1040 on the S&P 500  If we close below this level, where do we go?  The next important stop would be at 1009  This is the 38.2% retracement of the market advance from March 2009 to April 2010  If 1009 does not hold, look for support at 943, this is the 50% retracement level.  943 has added importance as it was a resistance level for the market last June and earlier in January of 2009.

We saw buying kick in today as the market dropped down to 1042  Will these buyers be punished.  Maybe.  If you are buying high volatility stocks as a trade you may have hooked your wagon on a mustang that will take you for a harrowing ride.  Set your stop just below the low and hold on.  If you are an investor with a longer window and willing to put up with a little pain, some blue chips are offering attractive prices.  BRK-B & KO shares are discounted 13% off their March and December highs.  XOM is discounted 20% from its high last November.  FCX is down 32% from its high in January.

Neither I, nor anyone can predict the future; we can only process the information available and make considered decisions.  We are neither bullish enough to jump in with both feet or so scared we won’t get in the water.  The problem we face is all the talking heads on TV spewing negative views (because if it bleeds it leads).  Perception becomes reality.  The market will overshoot the bad news this time, just as it overshot the good news in April.

We believe the market will trade in a range, from 1040 to 1150.  The chart above shows the 50-day moving average has acted as resistance on the up side in the last two weeks.  This are our parameters established so far.  We can easily get an outlier to a lower support level.  These should quickly bounce back as they are recognized as buying levels for traders.  But be cautious, the trip up could be short lived as we must retest and find the bottom that will hold. 1040 has been tested twice now, three times if you count Feb. 5, 2010.

To the mailbag on Oh! Bama:
I've only just read your first 3 paragraphs and have realized already that this is the exact VERY VERY SICK THING THAT IS GOING ON---paid up subscriber T.M.

Yes, the six month moratorium on deep water exploratory drilling will be expensive, but better to get safe procedures in place rather than stubbornly and foolishly plowing forward.  BP permit application stated they could handle "worst case scenario".  I guess NOT!---paid up subscriber D.W.

John’s reply:  I drove four miles to town this morning, there were seven dead animals on the highway from being struck by cars.  If you cringe over the dead in the gulf, start driving 35 miles an hour rather than risk killing an animal with your car.  It works; we have not killed one large animal with our electric car in over two years.  We stop and let them pass!  I think 20 mph is safe for insects.

You take pot shots galore at Obama, but you turn your complaints into opinionated carping by failing to make clear what Obama should do and why.  Another difference between the two executives we elected: Except for providing for health care for the indigent, Obama is solving problems he did not create. If I am not mistaken, the solution you decried today (i.e. TARP) was not his creation; it was born in Doofus' administration. Even the anemic offshore oil drilling regulations that may lead to the demise of BP can be traced to lax regulations spawned by anti-regulation zealots who ran amok in the last Administration ---subscriber J.R.

John’s reply: 1.) I don’t want him to do anything.  Don’t take over car companies, don’t apologize for our country, don’t lie to the American people, don’t continue the campaign, don’t demonize people or companies that disagree with him, don’t spend more money we don’t have, and don’t use the credit crisis to morph the government into a socialist state.

You are correct; TARP was authorized under President Bush to stabilize the financial system.  The Bush administration spent less than half the money, knowing it was the availability of a fire truck that kept the fire from spreading.  Oh! Bama proceeded spending the bulk of the money, and now when banks pay it back, he wants to spend it again rather than return it to the treasury.

How long does Oh! Bama have to be in office before he is responsible for ANYTHING?  His people, his department, his responsibility.  He has demonstrated his proclivity to push his agenda; I guess deep water safety was not important enough to garner his attention.  Personally, that is fine with me as I recognize the government is a destroyer of wealth (and freedom) and cannot do anything efficiently.  But please quit blaming President Bush for problems.  Otherwise, I will have to bring up Truman sentencing half of Europe to life behind the Iron Curtain because he ignored Churchill’s warnings or his collapse of support for the troops when Chinese hoards crossed into North Korea.  The buck stopped with him, until he dropped it!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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