The force is strong with this one — the dip-buying force, that is.
“Despite [the] collapse in crypto markets and rather hawkish FOMC minutes, another equity dip was bought by investors,” JPMorgan’s Nikolaos Panigirtzoglou wrote, in the latest installment of the bank’s popular “Flows & Liquidity” series.
By now, regular readers are well acquainted with the figure (below), which shows global equity funds taking in nearly a half-trillion in 2021 — with seven months left to go in the year.
Around $388 billion of the $495 billion total is attributable to ETFs. Of that $388 billion, around $210 billion went to US equity ETFs.
“This ‘buy the dip’ mentality has been remarkably strong and has provided support preventing any small correction in equities and risk markets from becoming more extended,” Panigirtzoglou remarked, characterizing equity ETF flows as a kind of organic plunge protection.
“The ETF flow has represented a wall of money backstopping each dip in equity markets so far this year,” he wrote. The chart (below, from JPMorgan) shows flows into stock ETFs in and around dips.
This is quite simple, Panigirtzoglou suggested. “The greater the dip the higher the equity ETF flow,” he remarked, adding that the “Who?” in this equation is “mostly retail investors.”
On Monday, Nomura’s Charlie McElligott cited the same flows, which he said are “holding things together.”
Late last week, Panigirtzoglou asked “what could end this wall of money backstopping equity markets following each dip?”
As noted here on countless occasions over the past several years, Pavlov is alive and well when it comes to the dip-buying mentality.
Think back to the dynamics which allowed “BTD” to metamorphose from a derisive meme about retail bagholders into a viable (indeed, a nearly infallible) trading “strategy.”
Investors became acutely aware of their own role in shaping the evolution of monetary policy — they learned that beyond a certain threshold, central banks would verbally intervene to reassure markets. Once investors knew to expect verbal intervention at, say, 10% down on a major benchmark over a short window, it made little sense to wait on equities to fall 10%. If you know it’s coming down 10%, you buy down 7%. But if you suspect the next guy (or gal) has made the same calculation, you won’t wait around for him (or her) to buy down 7%. Rather, you’ll buy when stocks are down 5%. Everyone is front-running everyone else in an effort to front-run central banks, and before long, the entire exercise becomes so recursive and self-referential, that even the most minuscule of drops are immediately bought.
That dynamic is doubtlessly still in play, but we may have succeeded in creating an even more powerful version of the same self-fulfilling prophecy. If retail ETF flows are “backstopping equity markets” and “holding it all together,” then the only thing that can undermine the success of a BTD “strategy” is if people stop deploying it.
“We suspect that retail investors have been keen to buy each dip on the belief that the past year’s steep uptrend in equity markets is still intact,” JPMorgan’s Panigirtzoglou ventured. “So a reassessment of this belief could hurt the ‘buy the dip’ mentality.”
The only thing for retail investors to fear, it seems, is that they become fearful.
TINA
Panigirtzoglou suggested. “The greater the dip the higher the equity ETF flow,” he remarked, adding that the “Who?” in this equation is “mostly retail investors.”
I wonder how he can parse just who is buying ETFs. Especially those amounts. Don’t all types of professional speculators, such as hedge funds, many traffic in ETFs as well? Do they have access to data that separates the flows in ETFS?
It’s not like futures where there is some effort to label the players.
Exactly my thinking! Wouldn’t it make more sense that these various brokerages that run the ETF’s are instead deploying automation tools to “BTFD” because for years now it’s been beneficial to their shareholders? X Exchange drops a macro 3%, execute share purchases against that exchange that were pre-baked that morning? Seems more logical to me than all of retail, who is likely at work when this is all happening, logging on and making purchases.
And maybe I missed this but are we also not sure the ETF’s are actually doing the selling to create the selloff events and then leveraging those cash positions to by the dip? Could they be using margin to perform these purchases?
I just question where the heck retail investors are coming up with all of this cash considering the insurmountable debt they are in, the missing 10M jobs, and the inflationary effects on goods and services now in play.
I mean the simple answer is if you’re buried in debt with no hope of working your way out… where do you put some extra stimulus money? If you can put your home payments on hold for a year… do you just go long on the market and hope you come out the end of the year with enough gains to finally see freedom? I mean if you’re already buried a hail mary seems better than hopelessness.
I am honestly kicking myself I didn’t do it. I was so tempted and I’m not honestly sure it would have been a bad call if worst case I could refi the missed year back in over 30 years.
Retail investors can make automatic purchases using many different apps like RH or even Acorns where one can set a recurring investment. Working folks who have access to a 401k or IRA are also continuing the make contributions… Probably not enough in either of those categories to tip the scale one way or the other by itself but something to consider…
Everything works until it doesn’t…while a grueling grinding bear market may be a few years away interim pain will be felt when the dips exceed 5% which is a bit comical, and I suspect mini panics may occur as a result … we shall see…
In the past several months, each of the clearly over-heated parts of the market have been taken down pretty hard. SPACs, the Archegos fund, crypto “currencies”, the frothiest tech stocks and pandemic winner stocks – these mini-bubbles have all deflated some -30% to -40% from their highs, usually in just a few months. This has caused some volatility in broad markets, but little/no actual damage: for example, over the last 3 months, Nasdaq 100 is up +2.9%, S&P 500 +7.3%, Dow 30 +4.5%. Looking under the surface, broad market valuations have improved as estimates have rebounded higher: over that time, the forward P/E of Nasdaq 100 is down from 31X to 27X, S&P 500 from 23X to 21X, Dow 30 from 20X to 19X. The broad indicies’ resilience is impressive but is it that surprising, given the economic rebound underway and all the cash that “needs” to get invested, from retail mattresses and institutional accounts alike?
Look at the largest market caps in the SP500: AAPL ($2.1TR) has traded sideways since 9/2020 and its NTM PE is down from 31X to 24X. MSFT ($1.9TR) has been moving up more or less steadily, and its NTM PE is down from 33X to 30X. AMZN ($1.6TR) has traded sideways while its NTM PE has gone from 114X to 52X. GOOGL ($1.6TR) has moved up strongly and its NTM PE has gone from 32X to 26X. FB ($0.9TR) has moved up well and NTM PE has declined from 30X to 23X. Etc. Basically, the biggest SP500 names have been “growing into their valuations” while generally holding price. Looking over the larger SP500 names, the only real L3M pain (double digit % declines) have been in TSLA PYPL INTC AMD NOW MU, which are large stocks but not enough to drag to SP500 down. Meanwhile, the SP500 index has been going up almost like a ruler, the last time it ever threatened its 100 day MVA was October, and it doesn’t look parabolic or exhibit any obvious negative divergences. I like being bearish as much as the next guy, and it warms my heart to see the speculative BS get cratered, but on an overall basis, this does not look like a market to be bearish about. That’s in the US – go overseas and things look even stronger.
Finally, you absolutely do not have to own the bull-s**t stuff to make money here. For stockpickers, its like being a pig rolling in whipped cream. Sure, valuations are not low, but visibility for the next year or so is pretty high, and you don’t have to take silly risk to reasonably swing for at least mid-teens total portfolio returns (capital gain + dividends) over the coming year. That’s not “bragging rights” sort of forward returns, I guess, but let’s not get greedy here, ok?