Buying on Dips Pays Most in Five Years as Stocks ReboundLu Wang
Not since the bull market began has buying dips in the Standard & Poor’s 500 Index been a surer way of making money.
Declines in the benchmark gauge for American equity are lasting an average of 1.5 days in 2014, the shortest since at least 2009, according to data compiled by Bloomberg. Starting last year, returns on days after the index fell have averaged 0.13 percent, the highest since they were 0.38 percent in 2009.
The ease with which equities are shaking off bad news is emboldening investors and may explain why some of the biggest rallies of the year have come amid geopolitical crises. While Marc Faber, publisher of the Gloom, Boom & Doom report, says it represents euphoria usually confined to market tops, the strategy worked over the last two weeks amid escalating tensions in Ukraine and the Gaza Strip.
“Folks have been waiting for a big correction for some time now -- where is it?” Brian Barish, president of Denver-based Cambiar Investors LLC, which oversees about $11 billion, said in an interview July 22. “However horrible it all was from 2007 to 2009, it is now that amazingly bullish.”
Rising earnings from Apple Inc., Biogen Idec Inc. and Chipotle Mexican Grill Inc. last week helped send the S&P 500 to its 27th all-time high this year. More than $15 trillion has been added to U.S. equity values as the S&P 500 almost tripled from a 12-year low in 2009, fueled by monetary stimulus from the Federal Reserve, a five-year economic expansion and record corporate profits.
The S&P 500 was little changed at 1,978.91 at 4 p.m. in New York, erasing a 0.6 percent drop earlier, as merger activity and optimism over corporate earnings offset concern over crises abroad before a Fed policy decision.
Losing streaks in the U.S. equity market are getting shorter. The S&P 500 has posted no declines that lasted more than three days in 2014, compared with an average of nine a year since March 2009, data compiled by Bloomberg show.
Drops this quarter have lasted 1.2 days, down from 1.5 days in the previous three months and about half the length in 2012. The number of losses has stayed roughly the same as in the past. There have been 59 down days this year, compared with an average of 61 during the same time period since 2011.
“Almost any time you see a hint of a pullback in the market, money seems to come flooding in,” Timothy Ghriskey, who helps oversee $1.5 billion as chief investment officer for New York-based Solaris Asset Management LLC, said in a phone interview July 22.
On July 10, the S&P 500 fell 1 percent in the first half hour of trading on signs of financial stress at a Portuguese banking company. Bulls stepped in and the index pared losses during the day. The index fully recovered July 14.
The downing of the Malaysia Airlines plane and Israeli military strikes sparked a 1.2 percent drop in the S&P 500 July 17. It rebounded 1 percent the next day.
On March 3, the index slid 0.7 percent on concern Russia’s support of separatists in Ukraine could lead to a larger conflict. Stocks rallied the next day, sending the S&P 500 up 1.5 percent, the biggest one-day gain of the year.
The consistent gains have encouraged individual investors to buy stocks. About $190 billion has been added to equity mutual funds and exchange-traded funds since the start of 2013, data compiled by the Investment Company Institute and Bloomberg show. That’s a reversal from the five years through 2012, when $300 billion was withdrawn.
“Willingness to buy on a dip implies confidence,” Stacey Nutt, chief investment officer at ClariVest Asset Management LLC in San Diego, California, said in an interview July 22. His firm oversees about $4 billion. “It is a sign of economic strength revealing itself in the market.”
For other financial professionals, the unbroken advance is stirring anxiety. The market is on the verge of a bubble or is already in one, according to three in five people surveyed in a Bloomberg Global Poll of investors, analysts and traders conducted July 15-16.
The S&P 500 is about 25 percent above its peak in 2007 and trades at 18 times reported earnings, near the highest valuation since 2010, data compiled by Bloomberg show.
“We are in a bubble,” Faber, managing director of Hong Kong-based Marc Faber Ltd., said in a July 21 interview with Alix Steel on Bloomberg TV. “In a bubble, people are optimistic, there is euphoria about prices going higher and so forth. And that may be possible. The question is, ‘Are stocks good value?’ and I don’t think that U.S. stocks are.”
Some of the most sophisticated investors are being penalized by wagers that equities will fall. The HFRX Equity Hedge Index is down 0.1 percent in July, headed for its fifth drop during the past seven months. The Global X Guru Index ETF, which tries to replicate hedge-fund holdings, is up 3 percent in 2014, compared with a 7 percent gain for the S&P 500.
The S&P 500 has gone without a 10 percent loss for 33 months, the third-longest stretch since 1990. On average, corrections have occurred every 18 months since 1946, according to a study by Sam Stovall, chief equity strategist at S&P Capital IQ.
“It’s a better environment for long investors,” Dan Miller, director of equities at GW&K Investment Management in Boston, said by phone July 23. The firm oversees more than $20 billion. “Every market drop is going to be met with a new list of buyers coming back to stocks, and feeling that they can’t afford to miss the next leg of the bull market.”