“For the first time since the financial crisis, dip buying has failed,” the “Mad Money” host warned, referring to his tried and true strategy of buying great stocks during their downturns.
My comment: This is what will ultimately, over time, put in a bottom.
The NASDAQ top in 2000 was classic in this respect. All investors were conditioned and trained by recent market behavior to buy every dip. This has been well rewarded basically since the bottom in 2009.
This is the first time it is starting not to work.
Here is how it plays out on a Behavioral Finance analysis – which is a very key thing I focus on.
Everyone buys the first dip since historically, that is all you got.
There is a small bounce, but not enough to sell and then the stocks go lower.
So the investor says great, I can buy more even cheaper. And this time it is usually on margin because he is already fully invested all the way up and bought more on the first dip.
And there is a small bounce, but not enough to sell and the stocks go lower through the second buy level.
Now the reaction switches from greed on buying the dip to fear it is not working.
This is where capitulation begins.
This is where selling occurs because there are margin calls to meet.
This is where selling occurs because instead of thinking that the stock is going up 100%+ like it has done every time in the past, there is fear that it is going to zero.
When the behavioral finance psychology gets to the point where everyone knows that stocks are down huge from a prior high, but they still want to sell them because they are afraid that they are going much lower still, THAT IS THE BOTTOM.
When investors refuse or are afraid to look at their brokerage statement because they are afraid to see the new lower value in their portfolio or they feel that if they do not look that it is not a loss, THAT IS THE BOTTOM
You can watch for these yourself by:
- Listening to what others say at the holiday gatherings
- Look in the mirror
- Watch the CNBC / retail investor news outlets for panic in the headlines
History may not repeat itself, but investor psychology always does.
Watch and profit from it.
Brian Sly and Company, Inc.