How to know when buying the dip is a wise move

To get a better grasp of buying the dip, let's dive into two real-world examples — one where it worked well and another where it didn’t. By looking at these historical scenarios, we can explore some indicators that might have helped distinguish between the ultimate winner and loser. However, it's important to acknowledge the challenges in calling the winners. While hindsight makes it obvious, it’s usually not so clear at the time.

Success story: Apple in 2018

In late 2018, Apple stock took a significant dip, falling from around $230 to $150 per share  due to concerns about slowing iPhone sales and a broader market correction. Here’s why many investors were skeptical about Apple’s continued market dominance at the time:

• Market saturation: There were real concerns that the market for the iPhone was becoming saturated.
• Trade tensions: Ongoing trade tensions between the U.S. and China added uncertainty, particularly for Apple, which had significant manufacturing and sales exposure to China.
• Competition: Increasing competition from other tech giants and emerging companies made Apple’s growth prospects less certain.

Despite these concerns, buying the dip in Apple turned out to be a smart move for several reasons:

• Strong fundamentals: Apple had a robust balance sheet, strong revenue growth, and a loyal customer base.
• Technical support levels²: The stock was approaching long-term support levels around $150¹, which had previously acted as a strong buying zone.
• Temporary concerns: The dip seemed to be driven by temporary concerns of slowing iPhone sales and broader market fears, not a fundamental change in the company’s business.

Investors who bought shares in Apple during the second half of 2018 saw significant gains as the stock rebounded to new highs, driven by strong earnings reports and continued product innovation.

Contrast: General Electric in 2018

General Electric (GE), a well-respected, diverse conglomerate with businesses in a wide range of industries, experienced a significant decline from 2017 to 2018. The stock plummeted from around $30 to below $10 per share³. Initially, investors saw this as a buying opportunity due to several factors:

• Historic blue-chip status: GE had a long history as a reliable blue-chip stock, which made many investors believe it could bounce back.
• Leadership changes: The appointment of a new CEO was seen as a potential catalyst for a turnaround.
• Asset sales: The company announced plans to sell off underperforming divisions, which some investors saw as a strategy to refocus and strengthen the core business.

Despite these factors, GE continued to decline due to ongoing operational and financial challenges, including declining revenues, high debt levels, and problematic business segments. The stock also broke multiple technical support levels, and there was widespread negative investor sentiment due to the company’s structural issues and poor management decisions.

The line graph included here illustrates the point being made. When two stocks dip at once, it can be difficult to guess whether each will rebound or continue to decline. Note that the graph doesn’t refer to any specific company, including Apple or GE.

Buying the dip can be a smart investing strategy if executed with careful analysis and consideration of both fundamental and technical factors. By staying informed and understanding the underlying reasons for a stock’s dip in price, you can make more confident decisions.

While there are many factors to consider with each new stock situation, some general principles to evaluate when you’re thinking about buying the dip include:

• Evaluate fundamentals: Strong financial health, solid revenue growth and manageable debt levels are crucial indicators of a company’s ability to recover from a business downturn and rebound from a price dip.
• Analyze technical indicators: Look at technical indicators such as support levels, the Relative Strength Index (RSI), moving averages and other technicals to determine whether the stock is truly oversold and poised for a rebound.
• Understand market sentiment: Try to gauge if the dip is due to temporary factors or deeper, structural issues. Analyst reports can help you understand what issues institutional investors are studying. Temporary market fears often present buying opportunities, while long-term problems might suggest caution.
• Stay in the know: Keep up with the latest news and developments related to the market and the companies you’re interested in. Knowledge is your best tool.