According to a story in Bloomberg News published on July 12, buying the dip may have stopped working in U.S. equities.
“It’s not that there are fewer of them, it’s that declines have gotten longer, and the rebounds are weakening. At 0.06%, the post-dip advance is the smallest in three years. Weakening resilience has been a bad sign for investors in the past, when it often preceded broader selloffs.”
Maybe it’s just a cooling of volatility that will run its’ course. Or, it could be a sign that a top is forming. The current bull market is now over 6 years old, and it’s looking a little long in the tooth. It looks and acts a little tired.
“While the S&P 500 jumped 64% from 2011 through 2014, it’s barely budged since, and clients have pulled more money from mutual funds and exchange-traded funds tracking U.S. shares than any time since at least 2000,” Bloomberg notes.
Another sign of a potential top is that big asset managers are allowing their cash positions to build, rather than staying fully invested in the aging bull market. Latest figures from Merrill Lynch show cash balances at 5.5%, the highest since the Lehman meltdown in 2008.
MORE DIPS, SMALLER BOUNCES
Last year, the S&P 500 posted no dips of more than three days, compared with an average of six annually in the previous five, data compiled by Bloomberg show. 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.
Post-dip rebounds are about half what they were in the last two years. Coincidentally or not, during the calendar years prior to the end of the last 13 bull markets, post-dip gains shrank in three of them and disappeared in seven, data compiled by Bloomberg show.
WAITING FOR THE INEVITABLE
U.S. stocks have gone almost 1,380 days without a 10% correction, the third-longest stretch ever. That doesn’t mean the current streak can’t continue, it can. But it’s inevitable that the current bull will run out of steam at some point, and when it does, the dip buyers will get whacked.
Several indicators show investors are becoming more cautious. Short interest is at the highest level since the 2008 financial crisis, according to data compiled by the New York Stock Exchange.
In futures tracking the S&P 500, bearish contracts outnumber bullish ones by the most in three years, according to Commodity Futures Trading Commission data.
After tripling in price since March 2009, the S&P 500 is now stuck in a trading range, caught in limbo as traders and investors evaluate the prospects for the second half of the year. They worry about interest rate hikes, punk earnings, China’s stockmarket, and the possibility of the Eurozone coming unglued. Those are some heavy issues to ponder, and the big players don’t want to get caught leaning the wrong way when the dips turn into something more serious.