No End to Nightmares: Overnight Equity Declines Get Even Worse
Buying the dip goes AWOL in U.S. stocks.
(Bloomberg) -- Investors are losing their faith in the tried-and-tested tactic that’s worked throughout this bull market: treating every dip in U.S. stocks as a buying opportunity.
The SPDR S&P 500 ETF Trust, ticker SPY, which tracks the benchmark gauge of American equities, has fallen an average of more than 1.2% at the open compared to the prior day’s close in the past three sessions amid concern over the spreading coronavirus. The overnight gap is slightly worse than what transpired amid the re-escalation of the U.S.-China trade war in May 2019. It’s the poorest such showing since August 2015, when markets had a belated overreaction to the surprising devaluation of the Chinese yuan.
Just as was the case during the trade war, meaningful changes in the newsflow overnight have wreaked havoc on markets. But what’s different this time is what traders are doing once markets open: continuing to sell. SPY has fallen on an intraday basis in each of the past three sessions by an average of about 40 basis points. Meanwhile, the magnitude of open-to-close dip-buying back in May 2019 was the strongest in over a decade, by some measures.
Stocks tumbled around the world after a raft of new coronavirus cases in numerous countries outside China renewed fears about the ability of the illness to spread. In just two days, U.S. equities have lost more than $1 trillion in value. A measure of equity volatility surged the most since February 2018 on Monday.
But there’s a silver lining, at least in the short term, for equity bulls, according to Bespoke Investment Group.
“On average, when SPY has gapped down more than 1% on a Monday morning, it has averaged a gain of 0.87% on the following trading day,” the analysts wrote. “Monday gaps lower have also seen the strongest gain over the next week, and the second strongest gain of any weekday over the next month.”
To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net
To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Rita Nazareth, Brendan Walsh
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