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Buying The Dip: Did Your Portfolio Holding Go On Sale?

Highlights

A group of stock selection signals help to improve the overall performance of the BTD strategy.

May. 23 2018 — ‘Buy the Dip’ (“BTD”), the concept of buying shares after a steep decline in stock price or market index, is both a Wall Street maxim, and a widely used investment strategy. Investors pursuing a BTD strategy are essentially buying shares at a “discounted” price, with the opportunity to reap a large pay-off if the price drop is temporary and the stock subsequently rebounds. BTD strategies are especially popular during bull markets, when a market rally can be punctuated by multiple pullbacks in equity prices as stock prices march upwards.

In this report, we examine the stock performance of the ‘Buy the Dip’ (BTD) strategy within the Russell 1000 Index from January 2002 through October 2017. We also explore how a BTD strategy can be improved by overlaying three other classes of stock selection signals: institutional ownership level, stock price trend, and company fundamentals. We find:

  • A strategy of investing in securities that fell more than 10% relative to the broader market index, during a single day, significantly outperforms the index between 2002 and 2017 in the subsequent periods. The dipped securities yield cumulative excess returns over 1-day (0.47%) to 240-days (28%) between 2002 and 2016, all significant at the one percent level.
  • Though many large sell-offs may result from earnings disappointments and guidance changes, these events do not seem to impact a BTD strategy – the ‘Buy the Dip’ strategy is still profitable when we exclude events surrounding earnings or guidance announcements from our analysis.
  • A group of stock selection signals help to improve the overall performance of the BTD strategy.

Buying The Dip: Did Your Portfolio Holding Go On Sale?

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