At the start of the month, I wrote about why I was keen to buy the dip in the FTSE 100 when it fell below 7,200 points. As I write, the market is just a few points off 7,500 points, a strong bounce-back in the space of a couple of weeks. Here’s why the dip was of benefit, along with where I think the index trades from here.
How I take advantage of market dips
As an initial disclaimer, there’s no concrete way of knowing ahead of time whether a falling market is just a dip, or part of a larger correction. However, my thinking a few weeks ago was based on a few factors.
To being with, the FTSE 100 has spent much of the year in a particular range, with the bottom being around 7,000 points. On the latest move lower, I was confident that this level would be a low for now. Only if the market moved below 7,000 points would I conclude that something different was happening.
Further, the move seemed to be correlated to general investor sentiment, rather than specific new catalysts. When this is the case, I’m happier to be active in the market. If it tied in with something new, such as geopolitical tensions or a change in policy from the Bank of England, I’d be more cautious.
I take advantage of market dips using the free cash I have at the time. A fall helps to increase the dividend yield of income stocks, making them more attractive at the time. It can also push down the share price of value stocks, allowing me to buy on the cheap. In the long term, this move should reverse back to the fair value.
Where the FTSE 100 could go from here
Unfortunately, although the index has been well supported around 7,000 points, it has struggled to materially sit above 7,500 points this year. I think this is partially due to the outlook for the economy. It’s not a disaster right now, but there aren’t any real positive catalysts on the horizon that would support the FTSE 100 to make fresh year-to-date highs.
On that basis, I think the index will likely push higher towards 7,600 points but will struggle to make it beyond that point.
However, this doesn’t mean that my investment returns have to stall. The index is the sum of all the firms involved. As such, individual performance can exceed the average. So being active in my stock selection should allow me to try and beat the index return.
I’m also a fan of income stocks. Dividend yields have moved higher this year, with some great companies offering me yields in excess of 5% right now. Even if the overall market doesn’t shoot higher, I can still make a profit from picking up regular dividends.
Others might disagree with my opinion of where the FTSE 100 goes from here. Ultimately, as long as I’m happy with my investment strategy, that’s the main thing.