How to Adjust a Purchase Strategy in Volatile Markets

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Three phrases have dominated market headlines over the past two weeks. The phrases, ‘buy on the dips’,  ‘volatility’ and ‘market correction’ have traders and market watchers all abuzz. This tends to happen when a market goes a little wonky. Most recently, market pundits bantered about these phrases over the S&P 500 market selloff. All of these terms, however, relate to industrial metals markets too. Corporate buying organizations, especially MetalMiner subscribers, know that “buy on the dips” serves as an excellent strategy in a rising or bull market such as aluminum, but makes little sense in a falling market say steel, for example. 

Manage the volatility  – the mantra of any metals buying organization

First, a few definitions and current market challenges with each of the concepts:

  • Buy on the dips refers to the notion of entering the market or “buying in” literally when the price dips. The strategy, however, should coincide with a rising market (not a falling one) MetalMiner often says “Beware of Falling Knives” and buying on the dips in a falling market never makes sense.  
  • Managing volatility nobody wants to talk about this but nearly all markets have price volatility – some more and some less. The challenge becomes managing the volatility based upon the underlying market trend for that particular market.
  • Market correction  – some believe a correction means an 8% drop from a recent peak. Others say 10% and others may believe a correction lies in the 10-20% range. Regardless of the percentage drop, the key point to note is whether or not the underlying market has undergone a correction or if it has slipped into a bear market. 

How this plays out in aluminum

These concepts all come to light when looking at various markets. Take for example the aluminum, S&P 500 and HRC markets:

Source: MetalMiner Insights

With the gray line serving as the 15-day moving average, the red line as resistance and the green line as support,  the aluminum market appears especially volatile.  The main point industrial buyers need to recognize involves the underlying trend, clearly a bull market. In rising markets, “buying on the dips” makes sense.

S&P 500

But buying on the dips makes no sense in a falling market, particularly one that appears (as of Jan 24, 2022) to have transitioned to a sideways if not bearish market: 

Source: MetalMiner analysis of TradingView Data

Of course the S&P market closed above the bottom line of the channel (wedge) on January 31, (graph above) which would indicate no change in trend. On the other hand, if the price held below the channel and continued to drop, buying on the dips would make little sense because the market had broken below a key support level.

Bearish steel markets

Then we have steel markets. HRC has “exceeded” the percentage definitions of a “market correction” – closing in on a greater than 20% fall beneath September’s peak:

Source: MetalMiner Insights

Can one conclude that steel has fallen into a bear market? MetalMiner would argue yes, even though the headline price remains well above the historical average HRC price.

Buy with confidence

In summary, by understanding the overall market direction for the underlying market or commodity studied, buying organizations can more effectively navigate market volatility. Moreover, category managers will have a clearer understanding of this notion of when and how to buy on the dips as well as discern between a market correction and a fundamental shift to a bear market.

For more insight on how to read metal markets, download the free briefing document “The Art of Timing Your Buy”.

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