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Tuesday, June 14, 2022
Today's newsletter is by Emily McCormick, a reporter for Yahoo Finance. Follow her on Twitter.
Investors ready for a buying opportunity to emerge in these volatile markets may need to keep waiting.
And waiting.
“U.S. stocks have suffered their biggest year-to-date losses since at least the 1960s. That’s ignited calls to ‘buy the dip’,” Wei Li, BlackRock Investment Institute global chief investment strategist, wrote in a note Monday. “We pass, for now.”
U.S. stocks on Monday officially closed in a bear market, with the S&P 500 falling 22% below its January record high. Yet even after this drawdown, stocks probably have more choppiness ahead, and that’s made the case for staying on the sidelines compelling for the time being.
BlackRock's “pass” casts doubt on the near-term viability of a formula investors have successfully abided by for more than a decade — namely, that buying a dip in stock prices will generate a reliable return.
As recently as last year, a “buy the dip” strategy has amply rewarded investors: The S&P 500 jumped 114% from its March 23, 2020 low during the pandemic to its Jan. 3 high at the start of this year. The blue-chip index also avoided logging any 10% corrections over that period before finally dropping to meet that threshold in February.
There had been some early signs dip-buyers were starting to nibble at stocks at the beginning of this month. Fund investors increased their U.S. equity holdings by $13.4 billion in the week to June 1, according to data from the Investment Company Institute. That compared to inflows of $10.3 billion during the prior week, and outflows of $3.7 billion during the week before that.
But diving in on the dip now is likely premature, as BlackRock and others pointed out.
Dave Lutz, head of ETF Trading at Jones Trading, on Monday shared a multi-point “capitulation checklist” composed of signs that peak selling had occurred for stocks. Some elements have neared or flashed a convincing “yes” about whether capitulation has been achieved; others may leave hopeful bulls wanting.
Lutz noted the market sell-off has broadened out significantly, with the vast majority of both index components and asset classes moving down in tandem. The latest drawdown has included everything from typical safe havens like gold, to energy stocks, which had been a “hiding place” for investors this year during broader market sell-offs, Lutz said. Both of these, in Lutz's view, suggest capitulation, and thus a turnaround, could be coming soon.