Is Now The Time To Buy The Dip?

At the start of the month Analysts at LPL Financial reported that the S&P 500 index has in 15 of the last 16 years posted a positive return in April. With two trading sessions left in April 2020 and the NASDAQ 100 index showing a month-to-date return of -10.8% next year’s statistic looks nailed on to be referencing 15 out of 17. The question for many is whether now is the time to buy the dips? We look at some of the key elements to consider and the pros and cons of trying to bottom-fish the market, and more importantly, when.

What Went Wrong in April?

The multi-month slide in stock prices was given added momentum in April thanks to severe Covid lockdowns in China reminding investors that the virus hasn’t gone away, and some horrible earnings releases from previous market darlings such as Netflix. These came on the back of Q1 being dominated by concerns about supply-side logistics, inflation, interest rate rises, the Ukraine conflict and record oil prices.

With so many shock events battering the markets it’s almost possible to have forgotten that one of the few potential banana skins to have not appeared so far, is unemployment. That could be about to change.

Trading the Week Ahead

With the US Non-Farm Payroll numbers coming out on the first Thursday of every month the 6th of May is a day to add to the diary. Unless market sentiment changes before the NFP announcement this could be set up to be a lose-lose situation. Even positive news on employment levels could spook the markets as it would suggest there is room for wage-driven inflation to come into play thanks to employees negotiating pay rises to cope with rising living costs.

Before the NFP announcement comes out there are two potential catalysts in play that if they pan out correctly could trigger a bounce.

CME FedWatch Chart – 28^th April 2022

Source: CME

The most important event is the meeting of the US Federal Reserve on 3-4^th May. Traders will have to contend with the increasingly likely risk of a 0.50% hike in US interest rates but that is now priced in. According to CME Group’s FedWatch analysis, those trading in interest rate futures currently put the chances of a 50 basis point rise at 96.5%.

Added to the mix is that earnings season has only just got into full swing. For example, on Thursday 28^th April updates to investors will be provided by Intel, Ford, Merck, Unilever, McDonald’s, Barclays, and the largest firm in the world by market cap, Apple Inc.

NASDAQ 100 – Weekly Chart – Trading near 100 SMA and forming a double-bottom

Source: IG

There is always a dip and buying into the resulting bounce can generate significant returns, the question is how to time trade entry points. If the potential catalysts which are on the horizon are activated there is potential for a double-bottom price pattern to be confirmed. If Apple’s numbers beat expectations markets can be expected to rally, an interest rate hike of ‘only’ 0.25% could send them sky-high. The temptation to trade the current price slide is very real but it’s worth recalling the trading floor adage that sometimes the best trades you do … are the ones you don’t do.

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About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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