Dip Buying in the Context of Current Trade Talks
US automakers have emerged out of their corrective lows, but an experienced analyst estimates that dip buyers still shouldn’t be heading that way. TradeZero Ocean Place Cable Beach, Unit #1 Nassau, Bahamas
Buying stocks when prices are low has been one of the age-old strategies of stock trading and investing. However, this strategy can only succeed if the stocks have fallen due to external factors such as political or economic events that tend to adversely affect certain stocks more than the others. But if the stock prices have dipped because the companies themselves have struggles in their fundamentals that don’t seem to have a quick fix, you could lose a great deal of money. The industry could be facing potential downtrends through cyclical events that keep adversely affecting it.
Negotiations Don’t Make US Automotive Stocks Ideal for Dip Buyers The trade talks are progressing between China and the United States for more favorable tariff arrangements. The news of the negotiations actually caused the stocks to rise after the sudden fall as a reaction to President Trump’s decision to impose tariffs on some Chinese products. Industrial stocks were the ones hit the most after Trump’s tariff announcement at the end of last week but, thanks to a consultation period provided by Trump, the risk of immediate retaliation by China subsided. And, news of both the countries agreeing for negotiations raised these industrial stocks and the major indexes. Having said that, experienced analyst Alan Farley advises dip buyers to be cautious of automotive stocks.
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Cyclical Events Have Brought about Technical Damage Dip buyers typically buy stocks after their prices decline in the belief that they would eventually rise. Farley reasons that though American auto manufacturers have come out of the corrective lows they put in place during Trump’s tariff decision, these cyclical events have caused technical damage that has broken bullish patterns and caused the industry to enter into a phase of potential downtrends. The analyst reckons that dip investors should just watch the price action that unfolds with other investors rather than jump to buy.
Threat of Long-term Downtrend Evident precedent Steel prices are higher now and pose as much a challenge to the American auto industry as do tariff threats. The economic cycle is aging, and this aging is taking the sheen out of the comparative monthly sales. According to some analysts, the American automakers have already reached a cyclical top with the threat of a long-term downtrend if there is a slowing or stalling of economic growth. There is volume action among the largest players that seems to confirm this gloomy outlook. Institutions have been closing out the long-term positions. We all know that the buying dips concept has to do with market fluctuation. When they purchase stocks following a dip, these investors buy shares at prices that are highly discounted. But they should know that buying the dip does not always guarantee www.tradezero.co
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a sure path, since not all stock prices drop due to external market and political factors, but also due to negative developments in the underlying fundamentals of the company. The dotcom bubble burst is an example. Investors who bought those tech stocks when their prices dropped may have lost a good deal of money since those pioneering Internet companies did not have a business model that would generate a great deal of revenue. Dip buying perhaps only succeeds in an oversold market condition.
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