'Buy The Dips', A 5-Year-Old Trading Strategy, Continues To Be A Money-Maker

New york stock exchange traderREUTERS/Brendan McDermidTraders work on the floor of the New York Stock Exchange April 21, 2014.

This week’s trend of low-volatility up-days on the stock market is welcome after the spike in volatility we experienced in the past month and a half.

And it means one popular trading philosophy is still working: buy the dips.

Rich Barry of the NYSE MAC Desk discusses in his Mid-Day Market Update note:

…Why the speed bump? Remember, coming into 2014, market-gurus were predicting that this would be the year when the U.S. economy and the global economy finally gained some major traction and began to move under their own power. Under this scenario, the market credo in early January was “sell bonds / buy stocks” as the Great Rotation out of fixed income and into equities was finally going to take place. However, as a seasoned market-watcher once said, “when you think you have the keys to the market, they change the locks on you!” — and the ‘great rotation’ is looking more like the ‘great pumpkin’ everyday… Instead, interest rates are actually trending lower and investors are bidding up classically defensive sectors like Utilities, Health Care and Energy. What does this tell us??? It tells us that the market is not so sure that the U.S. economy is going to gain ‘major traction’ this year. However, with the ‘Yellen-put’, (formerly known as the ‘Bernanke put’) still firmly in place, smart traders should stick with the trade that has worked so well for the past five years: Keep on buying the dips…

Basically, the economy isn’t going gangbusters. But then again, that means the Fed won’t pull the plug on super-easy monetary policy any time soon.

This is a theme market strategist Ed Yardeni touched on this morning.

“I’ve previously made the case for a secular bull market in stocks on the premise that subpar economic growth in the US and around the world reduces the likelihood of a recession,” wrote Yardeni. “That’s because slow growth is bound to keep a lid on inflation, which means that the major central banks are more likely to maintain their easy monetary policies. In the past, maturing economic expansions often ended when inflationary booms caused monetary policy to tighten. The boom was then followed by a bust.”

The consensus on Wall Street continues to be “Buy the dips.”

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