A Test for Buying the Dip

10/24/2014 12:01 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The quick snap back rally in the stock market has some fearing they may have missed the dip but MoneyShow's Jim Jubak explains what he's looking for in the week ahead.

For the week ahead, look to see how—I guess the battle, if you will—between buy on the dip and, oh my God, we're headed to a correction plays out. In the days, well, really, from September 15 or September 18—which is when the market peaked—to October 15, we had a constant test on the downside of people's belief in buy on the dip. We had a 3% drop, a little bit of rally, and then the market kept going down so that clearly wasn't working.

We had a 3%, we had another similar situation at 5%, and we got down to 6% or 7%, and then the market snapped back and so we had a pretty big rally in the sort of week that starts on October 20. Part of that is, we got down to 6% or 7% down on the S&P, people said, “Oh, the market is coming back, I don't want to miss it!” So, we had 'buy on the dip' really out of fear of missing the dip.

I don't think the current weakness in the market is over. I think we've still got a lot of global growth problems and we've had a lot of optimism about the power of the European Central Bank to change the growth trajectory, or the growth slump, or the sinking into recession in Europe, but I don't think is going to play out and I think we've got some willingness to read mixed news as good news, because the market has sold off enough so all of those things mean that we're going to go through another period of testing it.

And then, see, okay, so if we get back to challenging 1950, 2000 on the S&P, are people going to say, “Oh, okay, so we're back to growth mode and we're headed toward an end-of-the-year close at 2250,” which seems to be a fairly common projection right now, or are people going to say, “Oh, this market is expensive, I've gotten the bounce, and start to see a selloff again as we go down and test the whole buy on the dip theory and maybe move back below 1900 to challenge 1800, 1850, 1820, and maybe see whether we go below that.

That's really what I'd be looking for, looking to see how this plays out for the next week, and whether the optimism drives us forward and whether that optimism itself starts to fail when we get back near 200.

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