Christmas 2018 Again? Market Veterans Wait to Buy Bigger Dip

(Bloomberg) -- Die-hard dip buyers are bracing for even more volatility -- and bigger, more enticing dips -- in the run-up to Christmas.

Stocks are duly bouncing Tuesday after the biggest three-day drop in the S&P 500 since September, but seasoned veterans are watching and waiting. 

“Show me 2018 Christmas Eve again -- then we’ll be buyers!” said Ben Kumar, senior investment strategist at Seven Investment Management LLP. “Not sure this really counts as a dip.”

Technical signals are behind him. According to Fundstrat Global Advisors, several factors predict another drop in the S&P including lack of oversold conditions and pressure on expensive growth stocks. 

Then, a long-awaited Santa rally could emerge from the coming end of a short-term market phase and the completion of a technical cycle called the Elliot wave structure, Fundstrat’s analysis shows.

Big ups and downs are common features of pre-Christmas trading when liquidity thins and moves are more pronounced. In 2018, the holiday-shortened week began with the worst pre-Christmas day on record before stocks notched a one-day surge of 5% on Dec. 26.

While Kumar doesn’t necessarily expect drama on that scale this year, he’s still waiting for bigger bargains. At the first sign of panic-selling he’ll pounce.

The so-called Santa Claus rally period starts the last five trading days of the year and first three of the following, and promises bigger gains than the first few weeks of December, according to Mark L. Newton, managing director and head of technical strategy at Fundstrat.

“Bearish sentiment combined with bullish seasonality looks to be an effective 1-2 combo to buy dips ahead of Christmas,” Newton wrote. 

Colin Graham, head of multi-asset strategies at Robeco Institutional Asset Management, has been on a buying spree recently, boosting exposure to small-cap stocks through Russell 2000 futures. 

Graham skipped Monday’s dip to wait for cheaper prices.

“We see this as opportunity to put some positions into portfolios that we think are going to do well,” he said. “We’re looking at areas of the market that are particularly cheap and unloved.”

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