Investors Alert: Buy This Dip!

The best way to dispel fear is to face the facts head on. Thus, I thought a good use of our time today was to discuss the 3 most common excuses given in the media for the recent market pullback followed by an honest discussion of each. In the end I think you will agree there is more smoke than fire…and that the long term bull market is still on track.

• Recession fears growing
• Unwinding of Japanese Carry Trade
• Warren Buffett Signals End of Tech Rally

Recessions Fears Growing

Yes, recent economic data has come in softer. Namely ISM Manufacturing and Government Employment Situation last week. Neither spells recession…but does point to a slowing of the economy. 

Now let’s remember the whole purpose of the Fed raising rates in the first place. 

Lower Demand > Soften Economy > Tame High Inflation

This was all part of the game plan of the Fed…it just took a lot longer than expected to come to fruition. This recent soft data represents the final nail in the coffin for high inflation further emboldening the Fed to lower rates at the next meeting on September 18th. 

The only question now is whether it will be a modest 25 basis point cut. Or will they up it to a 50 basis point cut which is now the assumed outcome given this past week’s stampede out of stocks and into bonds. 

Plain and simple, we need to heed the time tested advice “Don’t Fight the Fed!”

That’s because they are about to serve up the medication (rate cuts) needed to avert a recession and keep the stock market in bullish territory going into 2025. 

Unwinding the Japanese Yen Carry Trade 

Here is my layman’s explanation of the Japanese Yen Carry Trade. 

Japan has very low bond rates. So, it makes it attractive to borrow money in Japan at low rates and then convert the yen into other currencies to make higher paying investments there. This works as long as there is not too much disruption in the value of the currency. 

This financial game looks to be over creating massive and quick disruptions in world markets. This currently does not seem like a Black Swan type event that will have ill effects in terms of the collapse of any major institutions. Just money moves faster these days and this is what happens when everyone heads for the exit at the same time. 

HOWEVER, if we do start hearing word of any financial failings of major institutions…then it would be right for fear to increase and markets fall even further. After listening to many experts talk on the subject, this seems like a low possibility at the moment. 

Unwinding of Tech profits like Buffett and Apple

Anyone who has read my commentary the past few years knows how obscenely overpriced I view the Magnificent 7. Stocks that you buy in the best of times should not be the same ones you buy in the worst of times. And this mentality of every day is rainbows and lollipops for these beloved stocks can only lead to ridiculous overvaluations that simply cannot last.  

Let’s give Buffett credit for seeing the obvious and willing to take action on his value convictions. This is logical and rational. Gladly there are MANY other places for that money to rotate to. Like deserving small and mid cap stocks with attractive growth prospects trading for quite reasonable valuations. 

That was the game that was starting to take place in July as the S&P 500 was modestly in positive territory while the small caps in the Russell 2000 rallied 10%. That tremendous outperformance was the healthiest thing that has happened to the stock market in quite some time. And suspect more of that will be the case on the horizon. 

So long story short, the reason for stocks coming down so far and so fast was the “Unholy Trinity” of each of these 3 events occurring at the same time…which creates confusion…which creates fear…which creates an immediate desire to sell and seek safety. 

Where is Bottom…and When Will We Get There? 

Moving Averages: 50 Day (yellow) @ 5,447 > 100 Day (orange) @ 5,309 > 200 Day (red) @ 5,017

It is normal and natural to eventually test each of the key technical levels like the 50/100/200 day moving averages. However, touching the 200 day (aka long term trend line) is not a common occurrence. A few times a year at most. Yet you can go for nearly 2 years and never have a hint of worry of dropping to that level. 

So given that the last time we flirted with the 200 day moving average was all the way back in October 2023 means we have enjoyed a lot of time in the sun making easy profits in the market. Now is as good a time as any to retest that level to remove complacency from investors that have had it a bit too easy…and remove excesses from stock prices. 

Some call this type of correction “the pause that refreshes”. Meaning that the lower valuations will make stocks all the more attractive. 

Add to that notion the lower bond rates in hand…that will likely only go lower as the Fed takes action…then stocks will be more attractively valued versus bonds. This is best understood via the concept of Earnings Yield (E/P…the inverse of P/E). 

That value equation has improved from 4.68% Earnings Yield for the S&P 500 when it recently made new highs. And now is up to 5.06% thanks to the recent dip. This is becoming a more attractive rate of return than the 3.9% for the 10 year Treasury that will likely be 3.5% or lower as the Fed cuts rates in the months ahead. 

The notion of stocks superior value will come to the fore in time. Maybe as early as Tuesday as stocks bounced from oversold conditions. Yet that rally faltered a lot in the waning minutes. 

Unfortunately, I sense that the 200 day moving average (currently at 5,017) is a key area of support that will need to be tested more vigorously than what happened on Monday. This is especially likely as there is plenty of time for more weak economic data to emerge. Plus, the uncertainty over the election. Plus, any unforeseen issues in the further unwinding of the yen carry trade. 

Each will spark a sell first…ask questions later mentality. And thus, I suspect we have a date with destiny with the 200 day moving average that still lingers in the near future. 

The trickiest part of this is that it is always dangerous being bearish or defensive in the midst of a bull market. That is because the odds are on the side of more gains. Just a matter of when they kick in. 

Thus, I recommend that most investors continue to be near fully invested. The key is using this dip to our advantage to stock up on the kinds of shares that will likely outperform in the months ahead. 

We certainly took advantage of the dip with our 3 additions today. Amongst them was 1 notable tech position. Meaning that I am not afraid of buying tech stocks given the recent rotation out of the group. I just don’t have any appetite for overpriced tech stocks. 

But note there is a big difference between a stock being 20-30% off their highs versus being a true value proposition. Meaning that if the stock was 50% or even 100% overvalued to begin with (based on PE, PEG, Book Value etc) then only coming down 20-30% does not make it a value stock. 

Gladly the POWR Ratings, which is a big part of our 4 step stock selection process, has 31 different measures of value is VERY helpful in finding stocks that are truly attractively priced versus the rest of the market. And so we can most certainly find some attractive tech stocks…industrials…consumer cyclicals…materials and other growth oriented companies trading at TRULY discounted prices that improves our odds of future outperformance. 

Back to the main point…we are still very much in a bull market, but unfortunately in the midst of a well deserved correction to wring out excesses. 

No one will ring a bell when it is over. So, we just need to keep focused on the long term outlook by owning the best stocks most likely to outperform as stocks get back to the previous highs…and onto new record highs in the year ahead. 

I still strongly believe our unique 4 step process will unearth those stocks with the most upside potential. We just need the Risk On good times we enjoyed in July to return. Maybe that is soon…maybe a bit longer. Either way, keep your eyes focused on that long term horizon to do the best you can for your portfolio. 

And that is why I say unequivocally to BUY THIS DIP!

What To Do Next?

Discover my Zen Investor portfolio filled with 12 top stocks with tremendous upside potential. 

What these stocks have in common is that each has made it through the gauntlet of our proprietary 4 step process that weeds out weaklings leading to more 100%+ winners. 

If you are curious to learn more, and want to see my top 12 stocks, then please click the link below to get started now. 

Discover the Zen Investor & Top 12 Stocks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)

Editor of the Zen Investor

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