The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Dip-buying heroes
Risk-off was in motion in the premarket and it looked a little panicky even. Overseas markets lost 1-2% and the S&P opened down 70 points, about a percent. Precious metals were off big. The Dollar was off big. Bitcoin was off big. It was a carbon copy of yesterday except that the flight-to-quality was also happening. Treasuries were bid. Capital flow in early trading was tracking at 150%. It looked like we were starting a bona fide selloff. But the buyers went to work two minutes after the open and they pushed the S&P to unch’d in about 70 minutes. The index then spent the rest of the session between flat and +20 points. The index faded small at the close.
Like so many recent moves in the market, today’s moves have no clear catalysts. For unknown reasons, markets were on the verge of fear this morning. Dip-buyers were apparently immune and they took advantage of the situation. Once they established upside momentum, we saw a positive tape and a significant drop in volatility and concern. For anyone who is worried that the high valuations may be a house of cards, they can breathe a sigh of relief.
We have observed the power and the consistency of the dip-buyers all year. When no apparent events are causing a risk-off move, the dip-buyers lick their chops and go to work and save the day and laugh at the fools who sold. As always, we have to ask the question, what will the market look like when the dip-buyers don’t have the ability and/or the will to jump in with their bids?
When tariff-talk was nasty and Liberation Day threatened to cause a recession, the dip-buyers couldn’t support the tape. They may be laughing now but had the tariff situation not quickly changed for the better, they would be painfully holding the bag. However, since then, dip-buyers have quickly and confidently jumped in to any selloff that lacked a clear and compelling cause. The result has been a very steady rally over the bulk of the year.
My point is this: the dip-buyers are a powerful force. They are decentralized. They are both retail and institutional. They have diverse rationales. They have different calls to action. However, when they act, they establish upside momentum and they change the mood of the market. This is an unstoppable force *as long as* there’s no credible risk at work.
If future scares are much ado about nothing, the dip-buyers will contain the damage and keep the status quo long enough for the market to realize there was no boogeyman after all.
If the futures scares are much ado about *something,* the dip-buyers will still come in but they won’t contain the damage and we will drop hard.
In the second scenario, there is a crash concern. When the dip-buyers buy everything they can and the tape keeps dropping and the fundamentals worsen, will they get scared and dump? Will they even have a choice? Are there margin clerks and risk-thresholds that force their hands?
That’s what I worry about. When, not if, the big negative event occurs, the dip-buying heroes will be tested. One part of the test is withing their control, their psychological resilience. But another part may be beyond their control, the risk they end up with during a big negative event.
If they have appreciable leverage or they are beholden to risk-based allocation models, they will become unwilling sellers.
And on that terrible thought, see you Monday, have a great weekend.
-Mike
IMPORTANT INFORMATION
This is general educational information and market commentary and is intended for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.
All market and economic data herein is as of the date hereof and sourced from Bloomberg unless otherwise stated. The information is subject to change without notice and we have no obligation to update you.
This general market commentary is intended for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The views and opinions expressed constitute the author(s) judgment based on current market conditions, are subject to change without notice, and may differ from those expressed by other employees of Visdom Investment Group LLC ("Visdom") and Visdom. Past performance and any forward-looking statements are not guarantees of future results. It is not possible to invest directly in an index.
We believe the information contained in this material to be reliable and have sought to take reasonable care in its preparation; however, we do not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. Any securities referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by Visdom or by the author(s) in this context. The information presented is not intended to be making value judgments on the preferred outcome of any government decision. This information does not constitute Visdom research, nor should it be considered a recommendation of a particular investment strategy or an offer or solicitation for the purchase or sale of any financial instrument. Investing involves market risk, including the possible loss of principal. You should speak to your financial advisor before making any investment decisions. Visdom and its affiliates do not provide legal, tax or account advice so you should seek professional guidance if you have questions.
