Is this a dip to buy

Nifty finally broke down today more than what we had seen in quite some time. The last time we had a 2% or more cut was way back on January 27th. While the damage seemed to be big in Indexes such as Small and Mid Cap, we need to understand that these indices are up quite strongly for the year even after accounting for today’s fall.

CNX Mid Cap is up 35.7% for the year while CNX Small Cap is up an astounding 53.6% for the year. It will take quite a few dips such as this to call it a buying opportunity.

While markets fell by 2.1% today, its interesting to note that markets have not seen a dip of 5% since 1248 trading days (last recorded dip being on 06-07-2009). What is interesting is that this is the current rally is 1248 days old – something that has not been seen since the beginning of the Indices themselves.

While passive index investing is not as famous as it has turned out to be in US, I do wonder what is the likely reason for such a large amount of time without a strong correction. In the 2003 – 2007 rally, we had 2 episodes of 5% fall, once when NDA fell and the second in 2006 (May).

To me, a better indicator of a Buy on dip would be when markets have declined by 3% in a single session. While that in itself does not mean that its the lowest point, historical evidence suggests that markets have indeed bottomed our round around those levels at least for the medium term.

This correction was very much overdue and unless the Finance Minister brings out something spectacular, markets seem more likely to be disappointed.