Buy the Damn Dip
Buy the dip? Or sell this rip?
After three straight weeks of selling, investors have been understandably feeling anxious.
Tech stocks have been gut-punched since the middle of February. All told, the big, tech-heavy Nasdaq Composite Index was down more than 10.5% heading into the start of this week.
Is the bounce we’re seeing this week a sign that the bottom is in for tech stocks? Or is it just a short reprieve before the next wave of selling?
Here’s the good news — the data point to more upside ahead for the tech sector.
And that means with many formerly hot momentum stocks meaningfully lower than they were just a month ago, now could be a major opportunity to buy the dip.
First off, double-digit declines in the Nasdaq are actually pretty rare. Since the Nasdaq Composite Index launched back in 1971, we’ve seen 26 instances where the index sold off 10% or more. And historically, those dips have been spectacular buying opportunities.
On average, the Nasdaq Composite winds up 17.9% higher 180 trading sessions after crossing the 10% drawdown point.
Here’s what that looks like on a chart:
On average the Nasdaq Composite has returned 13.2% annually since inception. But folks who bought during double-digit drawdowns have seen double that annualized return.
Of course, there are exceptions. There are no guarantees in the stock market, after all.
Years like 1987 and 2000 (when the tech bubble peaked) came with some pretty nasty follow-up performance. But by and large, those are outliers. As long as you don’t think we’re in that sort of cataclysmic market scenario, it makes sense to be a buyer here.
On balance, even accounting for the worst years, the strategy of buying the Nasdaq during 10% drawdowns and holding for the next year has been a major net winner.
There are a couple of important takeaways from the performance chart above.
First, it takes a little while for stocks to find their footing following a 10% drop in the Nasdaq. Typically, the index has retested those lows before kicking off its big rally. That means we could see a few more weeks of churn before Mr. Market starts to show a stronger buy signal.
Second, from about the 50-day mark, the uptrend has tended to be pretty incredible. That bodes well for a mid-second-quarter rally in the tech sector.
To paraphrase Mark Twain, history doesn’t repeat, but it rhymes. Oh boy, does it ever rhyme.
And right now, the data point to a solid rebound for tech stocks.
Jonas Elmerraji, CMT