top of page
  • Writer's picturen ev

Trader's tip: Buy the dips like Warren Buffett

There are many reasons why you shouldn’t buy anything now and the financial media is kicking up a perfect bearish sentiment storm. Like with any trade, if you buy, someone sells. If you win, someone loses. It’s the same for inflation. If you pay more, someone receives more. The only time money is removed from the system is when it is taxed. Unfortunately, we have had a lot of money removed in 2022, even though spending flows are relatively high.

Weekly Index Analysis

Is there a best time to buy stocks? Many studies have examined simple strategies for capturing pension fund inflows by buying on certain days of the month. Whenever investors receive dividends and receive a salary, they are probably reinvesting a portion of those earnings back into their future. This money is then put into the stock market by pension funds. Over the long term, the best and simplest strategy is to buy an ETF that tracks the S&P500 on the last business day of the month and hold it through the first three business days of the next month. Holding beyond that and the returns are negligible to detrimental.

There are other considerations that have less academic research available to the public, such as tracking the US Treasury's surplus and deficits, or the effect of options trading within a calendar month.

Because the US government is the monopolist of the US dollar, it has potentially unlimited amounts of US dollars to spend in the market. As US economic flows have grown over the last ten years, the amount of spending is now around $7trillion per fiscal year. In terms of nominal figures, that money is pumped into the markets via defence budgets, social security, Medicare, and Medicaid along with every other spending needed to keep the country running. Corporate profits and individual wealth are increased because of these flows. There is, however, a limit to how much taxation there can be before the government takes more out of the economy than it is spending.

The current Biden administration wishes to balance the budget and reduce the deficit in the US. During the Trump administration and particularly during the worst of the pandemic, the monthly spending grew from $400 billion to $1 trillion per month and is currently back to $600 billion. Before Trump's presidency, the average was more like $300 billion per month.

Stocks started the year poorly as there was a deficit reduction and a surplus creation, this happened again in April, and it lasted until mid-May. The draw on personal savings, removal of stimulus and higher taxation meant that for every $1 spent by the government more than $1 was taxed back. Since fiscal support was not available to cushion any downturns during either period, the stock market dropped both times. We’re now teetering on a flip back to deficit but there is no guarantee that tax collection won’t remain high and there is certainly no extra cash being pumped into the economy as the Build Back Better plan has been buried. Add in market uncertainty and a Fed which is embarking on monetary tightening policies, and we may have to wait for a full recession before the Fed step back in with a bunch of stimuli. Otherwise known as a ‘Boom and Bust’ cycle.

Options expiry is another occurrence that happens regularly, and last Friday there were $1.9 trillion in options expiring. It is very important to take into consideration how much money is moving into and out of the markets, and that is even truer on quarterly expiries when we have what is known as quad witching. If you attempt to buy or sell in that kind of volatility, you might end up with an early stop out as the markets trade very erratically. When the market has cleared the options expiries, we often see the market move in a clean manner, rather than the sloppy mess before and during periods of rebalancing and expiry.

The Dow Jones Industrial Average (DJIA) made a new low for the year on that options expiry, before returning higher to close positive for the day. This was also confluent with a push into the 4.236 Fibonacci extension level which extended from the first pullback since the all-time high 36948 that printed on the 5th of January 2022.

As we’re approaching the end of the month, we must consider whether the stock market is giving any clues to what the next level of interest is. The DJIA would need to get back and close above 32754 which was the swing high from 17th of May, for it to make the beginnings of a bullish reversal pattern. A break of market structure and a higher high would get a lot of investors excited.

There are certainly good times to buy when you are in cash and that is when the rest of the market is most fearful. Seeing 500-point drops and indices moving into bear market levels make for great headlines and retail traders get scared, and sentiment drops across the financial press. Savvy investors are at this point looking to pounce. The best-known investor is billionaire Warren Buffett and after a quiet 2020-2021 he and his firm have been acquiring stocks on the dip. Considering he has the deepest pockets and is 90+ years old, so very wise, it would be prudent to follow him at this point. During the recent market downturn, he has added to his position in oil companies such as Occidental Petroleum and Chevron.

During this period of uncertainty and bearish sentiment due to rising inflation and the central banks pivoting towards monetary tightening, hearing heads of Institutional banks like JPMorgan saying that they are benefiting from the higher interest rates should be a clue that some companies are going to do very well in this environment and they’re not all commodity producers. Avoiding the tech stocks and therefore the Nasdaq for now and swapping out to blue-chip corporations and the DJIA may be the best move. Watching the flows at the end of the month and buying the dip would also be a good idea.

Before I get bullish, I would like to see the DJIA push above the current descending channel, through the market structure swing high and then find support from either of them. If this occurs the upside target would be the double top from April 2022 and the 35500 – 35600 zone.


Related Posts

See All
bottom of page