Remember this chart from BofAML?
Note the blue arrow and annotation on the right-hand side. “Competition to buy the dip becomes so strong, CBs no longer need to react.”
The two-way communication loop between policymakers and markets has become a self-fulfilling prophecy. Markets have become so conditioned to policymaker intervention and dovish forward guidance that no one sees any utility in waiting around for it anymore. After all, if you know it’s coming, why wait on it? Why not buy the dip now?
Once that mentality takes hold, it obviates the need for further dovishness. Markets react to the expectation of dovishness and in doing so, ensure that the policymaker “put” runs on autopilot.
Well in a testament to that, JPMorgan is out on Monday suggesting that investors buy the dip. But the thing is, there haven’t been any dips. We’re now buying dips that haven’t even happened yet.
“Some warning signs are popping up, but stay constructive and keep buying any dips,” the bank’s Mislav Matejka writes in a new note, adding that although “RSIs are overbought and Bull-Bear is the highest since 2010, fundamentals [are] strong, [and we] advise to remain OW equities and keep seeing any dips as buying opportunities.”
There you go. If you see a dip, you buy it. Immediately. Or better yet, buy it before it happens.
Here are some of the bullet points from the note:
- Growth upturn is synchronised regionally and not rolling over;
- Earnings to stay a tailwind, with SPX projections finally inflecting higher;
- Policy tightening is in early stages — stocks have never peaked before the yield curve became outright inverted; and
- Equities remain very attractive compared to most other asset classes. Bond yields should catch up with activity, especially as central banks will be buying less than net bond supply, for once.
- Banks in our view remain the best hedge against rising bond yields. OW Industrials on an upturn in capex. Stay UW Defensives, but Euro Utilities look interesting, with CO2 prices moving higher. Regionally, OW Japan and Eurozone. EM was our top pick in ’17, but we do not see it leading in ’18.
