Why 'buy the dip' is not that great a strategy - and what works better, according to this quant firm.

By Steve Goldstein

Passive investing outperforms a 'buy the dip' after drawdowns strategy, AQR finds

"Buy the dip" is a popular strategy. But is it smart?

"Buy the dip," or its saltier F-word-including alternative, has been ingrained in market psychology since the COVID lockdowns, as this chart on Google searches shows.

JPMorgan analysis released this week found BTD-adhering retail investors have outperformed the market this year, thanks to their aggressive buying when stocks negatively reacted to President Donald Trump's initial tariff policy.

So along comes a counterintuitive piece of research from the quants at AQR Capital Management, who say "buy the dip" actually isn't so great after all, at least not compared to "buy and hold."

The AQR team set out to test the strategy.

"You cannot just say 'if prices will one day be higher, then I should buy the dip,' as the belief that prices will eventually go up was also true before, during, and after the dip. This type of misconception seems to drive a fair amount of discussion of this strategy," say the authors, Jeff Cao, Nathan Chong and Dan Villalon.

For buy the dip to work, "it must be a relatively better time than normal to own stocks for a relatively modest length period going forward." There's also the other challenge of defining the rules to test buy the dip - length, severity, et cetera.

The AQR tests involve buying the dip and holding cash in the non-dip-buying periods. They tested 196 BTD strategies on the S&P 500 going back to 1965. The risk-adjusted returns - Sharpe ratio is the technical term - were worse across all strategies than just simply holding stocks passively. Testing on more recent data, from 1989 onwards, delivers even worse returns, with a Sharpe ratio 0.27 worse, which AQR says translates to 47% degradation. And the AQR team didn't even account for transaction fees, which would hurt the buy-the-dip strategies even more.

They also tested BTD as a complementary strategy, and while the results aren't terrible, the AQR team don't find a benefit in doing so.

Probably the more interesting analysis is just why buy-the-dip isn't that great. What they find is that BTD is basically value investing at a momentum horizon. "As long as markets exhibit momentum, BTD is effectively positioned against the prevailing trend. In other words, BTD investors, especially for holding periods of less than a few years, tend to bet on reversals when they should (in general) be betting on continuation," they say.

And they empirically tested that theory, looking at the correlation of buy-the-dip versus the SG Trend index, which is the average return of the top 10 hedge funds running trend-following strategies. The correlation was negative 0.14, which isn't huge but was consistently negative across all strategies.

Trend following, by contrast, offers real value when the market is in a downturn. Studying four drawdowns, the average buy-the-dip strategy fell 18% vs. the 40% average fall in the S&P 500, while the trend strategies rose 29%.

The market

With the S&P 500 SPX only 0.5% away from a record high, U.S. stock futures (ES00) (NQ00) turned lower. Crude (CL00) was trading below $60 a barrel.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              6857.12    0.12%   1.91%   16.59%   12.59% 
   Nasdaq Composite                                                     23,505.14  0.60%   2.18%   21.72%   18.36% 
   10-year Treasury                                                     4.113      9.50    0.90    -46.30   -5.70 
   Gold                                                                 4252.4     -0.09%  6.10%   61.12%   60.17% 
   Oil                                                                  59.57      1.86%   -0.43%  -17.11%  -11.31% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

The September personal income and consumer spending report is due, with the preliminary reading for the University of Michigan consumer sentiment index coming shortly after the open.

Netflix (NFLX) will pay $72 billion in cash and stock, or $27.75 per share, to buy Warner Bros., including its film and television studios, HBO Max and HBO from Warner Bros. Discovery (WBD) , which will spin off its networks.

Computer server maker Hewlett Packard Enterprise (HPE) offered sales guidance below expectations.

Ulta Beauty (ULTA) lifted its annual sales outlook thanks to beauty-product demand.

Shares of SoFi Technologies (SOFI) sank after the fintech company announced plans for a $1.5 billion stock offering.

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The chart

This is around the time when past falls boost manufacturing.

This chart from Variant Perceptions, as part of their 10 surprises forecast for next year, shows that the ISM manufacturing index tends to pick up 18 months after oil, the dollar and Treasury yields fall - which would be right about now. They give further reason why manufacturing outside of AI uses might improve next year, including companies taking advantage of new tax rules.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   META    Meta Platforms 
   PLTR    Palantir Technologies 
   SMX     SMX (Security Matters) 
   AMD     Advanced Micro Devices 
   TSM     Taiwan Semiconductor Manufacturing Co. 
   AAPL    Apple 
   BYND    Beyond Meat 

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-Steve Goldstein

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12-05-25 0901ET