Buying the dips a bad market strategy so far in 2016
The US stock market has put together 10 intraday rallies at the outset of 2016, and each one has failed to hold its ground.
In most cases, the bounces came either at the beginning or the very end of the day’s trading, and the moves suggest many investors still believe in “buying the dips,” a trade that had borne fruit throughout much of the post-crisis bull market.
That strategy hasn’t worked in the early days of 2016, with the two of the most dramatic reversals yet coming after failed late-day rallies on Monday and Tuesday this week, both of which stalled around the 1,950 level on the S&P 500 .SPX.
Moreover, these abortive rebounds could be doing deeper damage to the market by forestalling a capitulation moment, the kind of deep downdraft that clears out losing positions and forms a base from which the market can mount a lasting rally.
“Each day that passes, bullets are wasted creating more losing positions, meaning there will be less ammunition when we finally get capitulation, and it will probably occur at a lower level than it otherwise would have,” said Michael O’Rourke, chief market strategist at JonesTrading in New York. While the eight trading days so far this year have featured 10 such short-lived rebounds, the two this week on average were roughly twice the size of most that came earlier, and their failures led to two of the more notable thuds yet.
This week started with equities rebounding from Monday afternoon’s low, gaining 2.4 percent over a two-and-a-half-hour stretch that included the first 20 minutes of trading on Tuesday morning. The S&P 500 then fell back by 1.7 percent into Tuesday afternoon.
The next rally again started at around 2:30 p.m. ET (1930 GMT) Tuesday, and generated a 1.9 percent rise that once again stretched briefly into the following day’s trading.
But when that updraft lost hold around 9:45 a.m. ET (1445 GMT) Wednesday, and the resulting swoon was the largest yet, more than 3 percent from that early-morning high to leave the S&P at its lowest since September by the closing bell.
The broad-market index is now down 7.5 percent since the year began.