“Buy the dip” has been a rewarding strategy for much of this long-running bull market, but analysts at UBS said there’s something investors need to know.
PMIs are survey-based indicators that measure private-sector business activity. In the U.S., the Institute for Supply Management’s readings, particularly the manufacturing index and its components, such as the new-orders sub-index, are closely followed for clues to the economic outlook. A reading above 50 indicates activity is expanding, while a reading below signals contraction.
Risk-on, risk-off But Trahan and Blackman said that history shows over the last nine full economic cycles, going back to 1974, that buy-the-dip works the best when leading economic indicators, like PMIs, are accelerating. 3-item checklist There’s more to it. Determining the phase of the cycle is one part of a three-item checklist, the analysts said. The ideal risk-reward scenario is in place when the “risk-on” phase of the cycle is accompanied by interest rates that are supportive of an expansion in the price/earnings ratio and the earnings outlook is favorable. Right now, would-be dip buyers are 0-for-3, they said.
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