Company / Analytics

Analytics, 12 May 2022

Should you buy the dip in tech stocks?

As recent market sell-offs continue, many technology stocks are trading below their 52-week highs. Big tech companies have lost a combined $1 trillion in value in just three trading sessions, driven down by rising interest rates, inflation, supply chain challenges, and missed earnings.

In terms of market valuation, Apple lost about 229 billion, Microsoft lost about $189 billion, Tesla’s lost $199 billion (just months after its valuation fell below $1 trillion), Amazon has declined by $173 billion, Google-parent company Alphabet shed $123 billion, Graphics card maker Nvidia’s lost $85 billion.

Facebook parent-company Meta Platforms has lost $70 billion in value. Meanwhile, stocks of staple companies – considered safer options in times of rising inflation– have seen their valuations increase.

Investors might wonder whether it’s time to buy the dip or allocate assets into rising sectors (such as energy and staples) following the tech selloffs.

Why are tech stocks down?

After reaching a correction territory in late February, where the S&P 500 lost more than 10% if its market valuation from on geopolitical concerns, rising inflation and interest rates, the downward trend continues.

While the broader market has dropped in recent weeks, technology stocks have been most affected. Major tech companies have lost a combined market valuation of more than $1 trillion in just three trading sessions.

Notably, (in terms of market valuation) Apple lost about 229 billion, Microsoft lost about $189 billion, Tesla’s lost $199 billion (just months after its valuation fell below $1 trillion), Amazon’s has declined by $173 billion, Google-parent company Alphabet shed $123 billion, Graphics card maker Nvidia’s lost $85 billion while Facebook parent-company Meta Platforms has lost $70 billion in value.

Meanwhile, the tech-heavy Nasdaq 100 Index has slumped more than 7% over the past four days and on track for a sixth straight negative week, its longest losing streak since 2012. While index has been under pressure this year, Apple’s decline has been relatively recent and impactful.

Even institutional investors have lowered their holdings in tech stocks. Institutional investors haven’t held such a small position in technology in more than a decade. A February survey of fund managers by Bank of America, found that the share of mutual funds and hedge funds that are underweight tech outstripped the percentage that were overweight by 10 percentage points. This survey showed that institutional investors are holding the smallest position in technology stocks in more than a decade.

Interestingly, the stock sell-off resulted in Apple losing its position as the world’s most valuable company after falling about 9% since September peak, losing about $229 billion in market capitalisation. To put into perspective, this is equivalent to the market cap of 94% of the S&P 500 companies. The position of the world’s most valuable company has since gone (once again) to Saudi Aramco, whose valuation has risen due to uncertainty in the energy market.

Should you buy the dip in tech stocks?

The volatility and downturns currently experienced in the market are attempting investors to “buy the dip”, or take advantage of lower prices to increase long-term return potential. However, buying too early in a downturn, presents the risk of driving process much lower.

The question then is, when should you buy the dip? Though it is difficult to determine the extent to which a small dip might affect the market – including whether it would turn into a 10% correction or if a correction will turn into a bear market, typically defined as a 20% decline – there are certain metrics and strategies to consider figuring in the best time to dive into the market.

Financial advisors recommend monitoring price trends, including the 50-day and 200-day moving averages, which are considered effective indicators for understanding broad-based indexes such as the S&P 500.

The first line of support or resistance to a market uptrend or downtrend is the 50-day moving average. The number of stocks above or below their 50-day moving average can help investors understand the direction of the market – whether it’s headed for dip, a correction or a bear market.

Meanwhile, the 200-day moving average is the average closing price of an asset for the last 200 days. This metric represents more data, and is often more telling than the 50-day moving average. For example, if the price of an asset falls below the 200-day average line, it may indicate that stocks on the index may fall further, potentially representing a market correction.

A price above the 200-day moving average or 50-day moving average often result in greater declines in the market while price movement below the range or stops before it hits the 200-day or 50-day moving average may suggest the possibility of a minor dip.

Understand stock fundamentals

Often dips happen quickly and require fast decision on whether to buy or not to buy. But as an investor, you should not just buy stocks just because prices are down. Every financial decision should have a rational. Developing an effective rational requires fundamental analysis, which involves evaluating whether it’s the right stock to buy and whether it’s the right time to buy it.

In conclusion, though buying the dip may seem like a difficult strategy, especially for investors worried about sudden volatility, the best way to determine when to buy the dip, like with any security asset, is to adopt portfolio management strategies, including research and understanding the market and stocks of interest.

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