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Must… Buy… Dips…

By:

Chief Strategist at Interactive Brokers

Have equity investors become zombies, fixated on a singular obsession regardless of circumstances?  Hardly.  But if this morning’s trading activity shows us anything, it is that traders have become conditioned to see every dip as a buying opportunity.

Can we blame them?   The industry has seen a wave of new investors enter the markets over the past year or so.  Over that time, every, EVERY, dip in the broad market has ultimately proven to be a buying opportunity.  If something works without fail, of course people will keep doing it.  Even more experienced investors have seen the strategy work far more often than not since the past financial crisis.  Far be it from me to throw cold water on a hot strategy, but it is crucially important for investors to recognize the difference between acting reflexively versus strategically.

While recognizing that “this time it’s different” is perhaps the most dangerous phrase in investing, sometimes it really is different.  For many of us, yesterday felt different.  The precipitous decline in bond yields seemed to be much more about growth fears and a genuine flight to safety rather than a momentum trade in fixed income.  The Covid narrative worsened, offering the potential for more supply chain disruptions even if the risk for large lockdowns is slim to nil in most large economies.  It felt like the risk/reward calculus may have shifted more toward risk.

That said, there were solid reasons to consider buying the dip this morning.  As the graph below shows, the S&P 500 Index (SPX) held its prevailing trend line, and long-term moving averages remain solidly higher.  That is a pattern that favors buying dips rather than selling rallies.  As I write this, yields in 10-year Treasuries have bounced off their intraday lows and are slightly higher on the day.  That could indicate that the growth fears and/or safety trade in bonds may be abating. 

In yesterday’s piece, we acknowledged that the downdraft that began on Friday could easily be reversed quickly, saying: “I don’t have sufficient clarity to know whether today is yet another in a series of one or two-day dips that have proven to be buying opportunities, or whether there is a more significant change in sentiment.”  As of now, both could be true.  We are certainly seeing yesterday’s drop largely reverse itself, but we might also be seeing a broader change in sentiment.  Bear in mind that we spent most of the spring rising with nary a hiccup.  Now those hiccups are coming a bit more frequently.  That could mean we have more chances to buy dips, but also the chance that the dip is not actually a buying opportunity.

S&P 500 Index, Yearly Chart with Trendline (white), 100 day (green) and 200 day (purple) Moving Averages

S&P 500 Index, Yearly Chart with Trendline (white), 100 day (green) and 200 day (purple) Moving Averages

Source: Interactive Brokers

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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