Human nature is funny.
Everyone who misses out on an ‘original’ boom always promises themselves they’ll buy in if prices fall.
Then when markets give them the very opportunity they’d hoped for, they get too scared to buy in.
Because falling markets are a scary thing.
The headline writers churn out blood-curdling warnings. And simply put, no matter what your head says you should do, your primal instincts are telling you not to do it.
Pros on the other hand love to ‘buy the dip.’ This is their opportunity to build a stake in their favourite companies.
And this works out most of the time.
Until there’s the rare almighty market crash and the dip buyers crash and burn along with everyone else.
Technology stocks are in this position right now. They’ve fallen steeply and could be an opportunity. Or a warning depending on how you look at it.
So, is it time to buy the dip?
Or are further falls up ahead?
Let’s take a look at what history tells you…
Tech wrecks and aftermaths
This chart shows you three market cycles for the NASDAQ technology index over the past 25 years.
Source: Incredible Charts
As you can see, we’re in the third ‘tech boom’ phase of the last 25 years.
And this has been a monumentally big, decade long bull run for technology stocks. It’s the reason Facebook, Google, Amazon and Apple are the four of the most valuable companies in the world.
Though that tech ‘old timer’ Microsoft just pipped Apple briefly as the most valuable company in the world this month.
This third boom phase hasn’t been without doubters though. It paused for about a year from mid-2015 to mid-2016 as investors worried the good times had gone on too long. But then it resumed its upwards move.
That moment in 2015/16 turned out to be a ‘buy the dip’ moment. Always easy to say in hindsight though.
The question now is are falls in the tech sector of late another pause? Or the start of a new tech wreck crash?
There’s no question that technology companies dominate our lives these days. So, it would be hard to see Facebook and Apple fading away into oblivion any time soon.
But that outcome wasn’t always obvious.
Despite the hype from the original dotcom boom in 1999/00, it took almost a decade for the current boom to get underway.
This turned out to be the pivotal cycle that finally revealed the potential value of technology companies, people had been talking about for almost two decades.
A lesson for cryptocurrency investors perhaps?
But back to the most pressing question now then.
Should you buy the tech dip? Or should you stay clear for now?
Should you buy the tech dip?
Let’s look at a chart of one of the tech giants to answer this question:
Source: Incredible Charts
As you can see in Apple’s decade long rise there have been three buy the dip opportunities. I’ve labelled them as shake out zones in the chart.
These are moments weak holders are shaken out on the dips and are replaced by stronger holders who hold on for the next rise.
The question you’ve got to ask yourself now then is, do you think Apple can continue to grow earnings into the future? Is this a new shakeout moment?
I’m not going to answer that for you today.
But it’s the most basic question you have to think about. If you conclude Apple have a powerful business that can continue to grow earnings, then this could be a good time to buy.
Well if you look at the bottom part of the chart, there’s an indicator called RSI (Relative Strength Index). It’s often used by traders to gauge if a stock is overbought or oversold.
If it falls below or touches the 30 line that often indicates it is oversold and could be a good time to buy if you think the market has overreacted and you’re positive about future prospects still.
As you can also see though, maybe you can afford to wait a little but longer too. The RSI tends to range between 30 and 50 in a correction or downturn.
If you want a better entry point, you can wait for it to breach the 50 level before you buy. You won’t buy in as cheap, but the selling pressure may have subsided and the stock could be ready to resume its uptrend.
And lastly if you think that the tech sector has become an overblown balloon devoid of any real value, you can of course look to bet against the stock by shorting it on any near-term price bounces. Though this is a high-risk specialist strategy.
The point is this…
With investing there’s many ‘roads to Rome’ so to speak. In other words, there’s no right way of doing things.
But to me there seems to be clear opportunities in the tech sector right now. You just have to work out what they are and how you’re going to profit from it.
Contributing Editor, Money Morning
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