Dip Buyers Got It Wrong Again as Reversal Crushed Stock Markets

(Bloomberg) -- Stock traders’ instinct to “buy the dip” failed once again Monday as a brief respite to the sell-off in U.S. equities quickly reversed.

S&P 500 futures turned positive for 74 minutes this morning after the Federal Reserve announced a sweeping plan to pump money into credit markets. But the rout, which reached 5% overnight, quickly resumed amid pessimism about fiscal stimulus, with the cash gauge reaching new lows shortly after the open.

“It’s too early to start buying,” said Tim Ghriskey, chief investment strategist at Inverness Counsel LLC. “We have seen a lot of measures from the Federal Reserve, but we need evidence that the economic crisis is going to be fixed for investors to return.”

The failure of the buy-the-dip mentality is a reversal after an 11-year bull market in which any retreat in prices was, ultimately, a good time to add stocks. Investors have to reset expectations now, when seemingly every day brings more ominous headlines about the economic impact of the coronavirus.

While the S&P 500 is already down 35% from a mid-February peak, some analysts are expecting significantly more pain. The gauge may fall another 10% to 2,000 by late December under a worst-case scenario, according to Morgan Stanley’s Michael Wilson. That echoes Goldman Sachs’ David Kostin, who also warned the index may not bottom before 2,000.

Since the S&P 500’s Feb. 19 peak, buying the dip has been a bad strategy. The index rallied 4.6% on March 2 in its biggest gain since 2018, only to fall 3.8% in the next four sessions. It jumped 9.3% on March 13 before losing 12% the next day. Its 6% gain March 17 preceded a 5.2% rout the next day.

RBC Capital Markets is among banks warning that drops in major equity gauges may have more room to go. Asset managers’ positioning in S&P 500 futures is still above the levels seen during stock swoons in 2016 and 2018, the firm’s head of U.S. strategy, Lori Calvasina, said over the weekend, citing data from U.S. Commodity Futures Trading Commission.

Data on Dow Jones Industrial Average futures show a similar trend, she said, while asset managers’ positioning in Nasdaq 100 Index futures has barely budged since the start of the rout. Monday’s Fed announcement didn’t ease Calvasina’s concern about more market jitters ahead.

“It’s all about listening to the market,” she said by email. “If we break below 2,300 on today’s close that is telling us what the market is anticipating.”

The S&P 500 Index fell 4.8% to 2,195 at 11:44 a.m. in New York.

After breaching 2,351, the low of the S&P 500’s correction in late 2018, the index is trading just below the level it was during President Donald Trump’s inauguration in January 2017. Michael O’Rourke, JonesTrading’s chief market strategist, says the index will be attractive at 2,160.

To Paul Hickey, co-founder of Bespoke Investment Group, the current level of risk is still too high.

“While the Fed’s actions are an enormous help, the only way the markets are going to find sustainable improvement is when the economy is allowed to come back to life,” Hickey said in a note to clients. “Or at least there is a real path in place for how that is going to happen.”

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