The bullish impulse today can be summed up as: Markets don't go up forever, but buy the dips.
The idea is appealing. After all, the S&P 500 hasn't fallen by more than 5 per cent since November, making it susceptible to some sort of pullback. Yet, with the U.S. economy showing signs of improving and with focus turning to how the Federal Reserve will unwind stimulus, rather than add to it, there is little reason to fear a prolonged market downturn.
However, John Hussman of Hussman Funds – who has rejected the bullish impulse for some time – believes that buying every dip is a sign of market danger.
"This tendency reflects a broadening consensus among investors that there is no direction other than up, and that any correction, however small, is a buying opportunity," he said in his weekly note to clients. "As investors clamor to buy ever smaller dips at increasing frequency, the slope of the market's advance becomes diagonal or parabolic."
This, he argues, is one of the warning signs of a bubble – and bubbles don't require major catalysts to burst "other than the retreat of some investors from the unanimous consensus that buying every dip is an act of genius."
The idea of buying the dip, as I pointed out here, was all the rage soon after the S&P 500 topped its 2007 peak and then fell all of 1.3 per cent. The index subsequently rose to new record-high closes last week and even topped its record intraday high.
No doubt, Monday's market turbulence has inspired more dip-buying. The S&P 500 was down 0.8 per cent in late-morning trading. Overall, it is down nearly 1.3 per cent (again!) from its high. Is that still enough to be considered a bargain to investors?
Meanwhile, you have to wonder if action within Canada's benchmark index is inspiring similar bargain-hunting strategies. Convulsions within the commodities sector has sent the S&P/TSX composite index down 6 per cent over the past month, making it a global under-performer.
Gold producers, as reflected by the S&P/TSX global gold index, have plummeted 45 per cent since September. And gold itself has fallen 28 per cent from its record high in 2011 and more than 14 per cent just since April.
Those are painful declines – and they challenge the notion that "buying the dip" is always a good idea, rewarded with quick rebounds. Investors seem to love brief dips; bigger ones are loathed.