How this “Popular Bull-Market Strategy” Can Backfire – Big Time
The financial history of Germany’s main stock index provides an example
by Bob Stokes
Updated: April 28, 2020
"Buying the dip" might work in a rip-roaring bull market, but it can cost you your shirt in a severe downturn.
Even so, this March 23 Wall Street Journal quote represents the mindset of many global investors:
I'm Scared. That's a Reason to Buy.
The true contrarian only buys when it makes him feel physically sick to press the buy key.
This was a more dramatic version of the clarion call from a number of financial websites in late February to "hang in there."
But, "hanging in there" and "buy the dip" are much more dangerous propositions in a ferocious bear market -- especially for the "buy and hold" crowd.
Our April Global Market Perspective provides a history lesson with this chart of Germany's main stock index during the bear market years from 2000 to 2003:
Over the course of a financially catastrophic 73% decline, the index experienced at least eight countertrend bounces of 10% or more. The largest rally -- a 54% behemoth that followed the World Trade Center attacks in the United States in September 2001 -- petered out by March 2002. Any dip buyers who got lured back in went on to suffer a disastrous 60% sell-off into the final bottom. And even the few investors who perfectly timed the September 2001 low lost 38% over the next 18 months.
Now, some market observers may say that investors who "hold" or "buy the dip" throughout a deep bear market will eventually come out ahead during the next bull phase.
Probably. Except, it may be years away. Japan's NIKKEI, for example, famously topped in 1989 and has not revisited that high since. China's Shanghai Composite topped in 2007 and has similarly stayed subdued. How many years will most investors wait before they "throw in the towel"?
Moreover, badly battered investors are afraid to commit to a new uptrend just when it's the most advantageous time to do so. At this point, shaken investors believe up days in the market are "head-fakes."
Indeed, the market has a way of fooling most investors at key market junctures.
Yet, you can be different. You can be prepared before important trend turns in 40+ markets worldwide.
Get on board with our Global Market Perspective now. Follow the link below to learn about our risk-free trial.
The Same Patterns of Investor Psychology Span the Globe
Investors in Japan behave like investors in Great Britain.
Likewise, chart patterns of widely traded U.S. financial markets unfold in similar ways to those in France, Australia, South Korea, India and other nations.
You get the idea: Elliott wave analysis works in any widely traded financial market around the world.
The Wall Street classic book, Elliott Wave Principle: Key to Market Behavior notes:
[The] Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress.
Learn what EWI's global analysts anticipate next for 40+ global markets in the May Global Market Perspective, which is set to publish this Friday.
Follow the link below to get started with our 30-day, risk-free trial.
Mainstream economic wisdom says Federal Reserve policy drives the price trends of gold. Now see the facts, charts and forecasts and show otherwise.
In a recent video, our Head of Global Research showed you the precarious position the United States finds itself in today. Murray Gunn made this comment: "When empires fall, it is usually accompanied with a debauched currency." Now Murray is back with a Part 2 of the video, where he tells you which country might stand to benefit.