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Is it time to buy the dips?

Is this the sell-off we had to have? The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) slipped close to 1% in late afternoon trade with just about every sector registering losses. The benchmark is likely to finish the week slightly in the red too and you won’t be alone if you are wondering if this has set a downbeat tone for the rest of the year.

The question is whether you should cash out now given the double-digit returns that the market delivered in FY17. Indeed, the ASX seems to be facing far more headwinds than tailwinds with tighter credit conditions, lacklustre profit growth, weak wages and the threat posed by offshore disruptors like Amazon.

I believe this sets us up for more pain and you shouldn’t expect the selling pressure to ease in the short-term. Large parts of our market has probably overshot on the upside and this means we have yet to see more down days on the ASX.

But this isn’t the time to throw in the towel. If anything, I am excited to see more market weakness as I have been putting aside cash for such an occasion. If we do see a downturn, you should buy the dips because this is very unlikely to herald a new bear market even though this bull market is getting a little long in the tooth.

The thing is, the conditions needed for a bear market aren’t quite there as the global economy is showing more positive than negative signs. After all, the prospect of higher interest rates around the world is in response to a stronger economic outlook, not the reverse.

This doesn’t mean you should be a raging bull either, although I would use any substantial pull back in the market to buy expensive stocks that I felt have gotten away from me in the past few months.

One example is property developer Lendlease Group (ASX: LLC). Its management practices are admired by industry insiders I have spoken to and its operational track record supports the feedback I have been getting about the company.

Another stock with an excellent operational track record and proven management team is four-wheel drive accessories group ARB Corporation Limited (ASX: ARB). I believe trading conditions are supportive of the group with miners starting to spend (albeit cautiously) again and sales of 4WD vehicles consistently outpacing the rest of the automotive industry.

Diversified fashion and stationary retailer Premier Investments Limited (ASX: PMV) is another to put on your shopping list. Its chairman Solomon Lew has proven time and time again to be crafty like a fox and there’s few are talented in retailing as its chief executive Mark McInnes.

Having said this, one strategy I will be shying away from is trying to pick bargains. This isn’t to say you shouldn’t be looking to buy value, but stocks that are trading at a discount to their peers are usually struggling.

Given that uncertain economic conditions are likely to persist in FY18, I would be inclined to stick with quality.

If you are looking for other quality buy ideas, click on the link below to see what other stocks have popped onto the radar of the experts at The Motley Fool.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. The Motley Fool Australia owns shares of Premier Investments Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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