Don’t Underestimate the Power of BTD

The past few days in the market have shown that the resilience of certain buyers can hold up a decline. After a number of solid corrections since the 2009 rebound, the market appears not in the mood to continue that.

Buy the Mother*** Dip

I have a Twitter account, which I use to read the articles and thoughts of interesting people. I also occasionally extol the virtues of our Constitution and Bill of Rights and point out violations thereof. Furthermore, I occasionally make a financial comment or link an educational financial article.

One of the fellows I follow loves to point out the power and sometimes lunacy of the buy the dip crowd – stock buyers who buy on any pullback. On one interesting stretch of days, after writing “buy the dip” or “BTD” a few times, he tweeted BTMFD which means essentially buy the dip with expletive added.

I can understand his point – there are people buying any dip in any market. Sometimes this force is stronger than other times, but either way, with this effect and monetary stimulus from central banks ongoing and ready to grow if needed, shorting stocks can be financially dangerous.

Shorting? Isn’t that Illegal?

During the financial “crisis” of 2008, we heard many times of the “evils” of short-sellers. And how they were driving down stock prices. This is, in my mind, one of the stupidest utterances that came out of that time. And who was screaming it the most? CEO’s of junky financial firms and their shills in DC. Here’s the thing – if short sellers were driving down stock prices below their true value, then companies could buy back shares at lower prices, forcing short sellers to cover and take losses. Nonetheless, exchanges banned short selling for a while during 2008-09.

Oh They Had No Cash

Yes these financial firms could do that if they had cash – but since they were levered – in some cases 40 to 1 – and had no cash on hand, they couldn’t buy back stock. Furthermore, the massive leverage, for example say 30 to 1, means that for every one percent drop in the value of the bank assets, you get a 30% drop in equity. it also means a 3.33% drop in bank asset value = 100% drop in equity, ie bankrupt/worthless. And some of the stuff they owned drop more than 3.33% in value (and this happened all over again with MF Global and John Corzine but with using client “segregated” assets to gamble. Former Senators don’t get arrested though).

Back to the Action

With all of that said, it looks like the market wants to correct another 3-5% here but the buy the dippers come in and buy keeping daily moves muted. Furthermore, hot Nasdaq stocks and some solid cash flowing large caps are being bought on the way up which is also helping to keep markets flat when it feels like they should fall.

We could see a continued move into “quality” stocks and out of speculative stocks. For example, we could see mining stocks continue to fall and stocks like Microsoft or Intel continue to rise. Profit margins are very high and any hit to those, either by lesser demand, higher producer price inflation or any other reason, could accelerate a move into quality stocks which, with larger margins, can weather a downturn better. Also, quality stocks, with cash flow and cash balances, can buy back stock at lower prices.

In other news, investors (including me) looking for the start of the major downtrend in 30 year bond prices (and a rise in interest rates) think they had their first shot last week as long bonds broke a channel and rates began to rise. Today however, as I write this, stocks are moving down a bit and there is a bit of strength in bonds.

The most important thing to watch, is how the market ends up. It almost makes no sense to make a trade in the AM as many days end up so differently by 4PM. As I mentioned above, speculative stocks are breaking down but leading stocks are still strong. If the speculative stock investors are right, we may get that flash crash I thought should happen as investors in leading stocks decide to sell all at once (if they are being bought by computers by trading algorithms, that could happen).

Be careful out there…

At the time of this writing, I or my clients own the following investments mentioned in this column: NONE

Note: this article is meant to be some helpful thoughts to share and not investment advice specific to you. Please consult your own advisor regarding investment and financial decisions. See our disclosures page