Dip-buying isn’t dead.
Or at least it wasn’t as of late last month. Despite mounting headwinds, including extreme ambiguity around the Fed’s reaction function in the face of the highest inflation in a generation, BofA’s private clients were buyers every week in 2022 through the end of February. As the bank’s Jill Carey Hall wrote earlier this month, “buying of this dip by retail was more aggressive than during other 10% pullbacks post-crisis.”
One week and multiple war escalations later, hedge funds were selling. “Clients were net sellers of US stocks for the first time in two weeks and for only the third week YTD since the selloff began,” Carey Hall said, in her latest update, before noting that “sales were entirely led by hedge funds,” whose net selling hit a record.
Retail clients, on the other hand, kept buying — just as they have every week this year. Institutional clients bought the dip too.
Before you suggest “dumb” retail dip-buying amid a potentially epochal shift in global commodities flows and the threat of all-out war in Europe is surely a contrarian indicator, note that according to BofA, retail flows are “a slightly better positive indicator than hedge fund flows.”
“S&P 500 returns following periods of retail inflows have been above-average and returns post-retail selling have been below average,” Carey Hall went on to write.
Over the past dozen years, the line between “dumb” and “smart” money became increasingly blurry. With developed market central banks keen to underwrite all manifestations of the short vol/carry trade, thereby perpetuating a relentless hunt for yield that pushed all investors out the risk curve and down the quality ladder, one of the best “strategies” was simply to buy dips.
Eventually, that became a self-fulfilling prophecy as the Pavlovian response function became so deeply ingrained that market participants habitually sought to front-run one another’s muscle memory, until the word “dip” became a misnomer. There were no more “dips,” just downward “blips.” And those were bought too.
In a world dominated by a (previously) friendly Fed, passive funds with rock-bottom expense ratios and zero-commission trading, it’s far from clear who’s “dumb” and who’s “smart.” Suffice to say paying 2 and 20 to underperform the S&P every year isn’t necessarily the “smartest” thing you can do, even if you get to boast of a higher Sharpe ratio once in a blue moon.
Ithink Ukraine will be behind us by 2H 2022.
Supply chains will reroute. Kind of like when a clogged artery reroutes.
TINA plus a longer horizon gives retail the edge over hedgies.
I just bought plane tickets to visit Europe (western) this summer.
Remember folks, every trade has two parts, a buyer and a seller. They must match up. No one can sell unless someone buys and vice versa. The initiator of any trade may have a bit more influence on the final price, depending on the general pressure of the market, but a “trade” is still a balanced transaction taking place between parties that disagree with each other about the prospective future benefits to be provided by the asset being traded.