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Buying the dip has been the right trade for so long that it has become ingrained in investors’ psyche. Ample liquidity in the QE era provided the ammunition, and with robust earnings growth investors learned that selling into a downturn was the wrong trade, particularly during 2016 and 2017 (think the Brexit and US election selloffs and sharp rebounds). Even corporates have learned to buy the dips.
The problem is that the world is changing, and the environment is shifting from one where dips should be bought to one where rallies should be sold. 1) QE has ended and global central banks are withdrawing liquidity, 2) earnings growth is set to slow from recent tax-cut fueled highs, and 3) poor performance and volatility is limiting risk appetite – as portfolios are whipsawed investors will slowly learn that dips are no longer meant to be bought.
Price - Action - Dip - Way - S
Price action in 2018 already shows that ‘buy the dip’ is on its way out. Buying the S&P 500 after a down week was a profitable strategy from 2005 through 2017, and buying these dips fueled most of the post-crisis S&P 500 gains (relative to buying after the market rallied). But in 2018 ‘buying the dip’ has been a negative return strategy for the first time in 13 years.
This shift is occurring in part because central banks are withdrawing liquidity and hiking rates, meaning there is less cheap money available to buy assets – both for investors and for corporates. And now this tightening in financial conditions is occurring as strength in earnings growth is starting to be questioned.
Investors - Dip - Performance - P/L - Managers
But the dynamic that will ultimately convince investors to stop buying the dip is performance. P/L for active managers (both HFs and MFs) is poor, which limits risk appetite, particularly at this time of the year. While some investors...
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