The death of buy-the-dip comes in a year when investor pessimism is creeping up amid a flattening in the six-year-old bull market.Richard Drew/The Associated Press
You're not imagining things: "Buying the dip" really has stopped working in U.S. equities.
It's not that there are fewer of them – 2015 has had more down days in the Standard & Poor's 500 index than any year since 2002. It's that declines have gotten longer, averaging 1.9 days, and the rebounds are weakening.
Easy money is getting harder to make in American equities, where Greece's impasse and the withdrawal of U.S. Federal Reserve stimulus have squashed momentum after two years of straight-up gains. Weakening resilience has been a bad sign for investors in the past, when it often preceded broader sell-offs.
"That you have this increased choppiness but failure to reach new highs is something that needs to be monitored," said Alan Gayle, director of asset allocation in Atlanta at RidgeWorth Investments, which oversees $43.5-billion (U.S.). "It could well be that these shorter-term traders are the canary in the coal mine. It could be signs of a top forming."
The death of buy-the-dip comes in a year when investor pessimism is creeping up amid a flattening in the six-year-old bull market. While the S&P 500 jumped 64 per cent from 2011 through 2014, it's barely budged since, and clients have pulled more money from mutual and exchange-traded funds tracking U.S. shares than any time since at least 2000.
The S&P 500 rose for a third day, adding 0.9 per cent at 9:45 a.m. in New York, after Greece reached an agreement with its creditors.
A simple strategy of purchasing the S&P 500 on days it fell generated some of its highest returns on record in 2013 and 2014, years when the duration of declines shrunk. Last year, the S&P 500 posted no retreats of more than three days, compared with an average of six annually in the previous five.
Halfway into 2015, the market has endured four declines that went on for three days or more, and the number of single-day drops has ballooned. Since the start of January, the S&P 500 has fallen 69 times, surpassing any year at this point since 2002.
While losing streaks are getting longer, the magnitude of losses is decreasing. Declines have averaged 0.57 per cent on down days this year, compared with 0.80 per cent since 2009.
Stock returns following losses are about half what they were in the past two years. Coincidentally or not, during the calendar years prior to the end of the past 13 bull markets, post-dip gains shrank in three of them and disappeared in seven.