It’s worked for decades and decades: “buy-the-dip” trade has been around for as long as markets themselves although it hasn’t always been a profitable strategy. But it has typically paid off in the last 40 years right up until...now. The average return a week after a 1% one-day decline is now negative. What happened?
Catching the proverbial falling knife hasn’t been too painful since the late 1970s. As the excellent chart by WSJ below shows, a larger than typical decline in the S&P 500 was almost always worth buying and holding for a week.
By far the biggest force and counterweight to market down days have been retail investors buying dips. They have been piling in even when institutional investors are coming out.
As per WSJ, they stepped in even on Sept. 13 when the S&P 500 tumbled 4.3% in its sharpest one-day fall since 2020. Individual investors bought more than $2 billion of U.S. stocks and ETFs, the second-highest total of the year.
In fact, for the year as a whole U.S. households poured almost $90 billion of fresh money into U.S. stock funds, according to EPFR Global data. Should the conviction in this trade wave continue - and the data sure isn’t looking good - stocks could suffer even more.
There are signs this may be happening. Individual investors’ trade activity in bullish call option trades, a common way to “buy the dip”, has tumbled to some of the lowest levels of the past two years. Ditto for intraday trading: it’s back to levels before Covid when everyone became a couch hedge fund manager.
The good news is that sustained market bottoms are built on despair. And we are starting to see it in spades.
Idea Spotlight: Costco (COST)
Costco execs stated on its this month that it's holding the line on membership fees even as rival Sam's Club recently jacked up prices. This move isn’t surprising. CEO Craig Jelinek famously recounted how his predecessor, Costco co-founder Jim Sinegal once told him, “If you raise the [price of the] effing hot dog, I will kill you. Figure it out.”
Realized volatility dropped to 30.12, and historically, this led to a median increase in price of 13.97% over the following 3M. TOGGLE analyzed 4 similar occasions in the past to produce the median projection and this insight received 5 out of 8 stars in our quality assessment.
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