Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business
since 2008, sending it daily shortly after the market close.
The opinions expressed below are my own
Chasing the tape. Bulls are flexing their muscles again and they are pushing prices back up. The news today wasn’t compelling so I don’t think today’s action was news-inspired. The macro data for the day was slightly hotter PPI, disappointing industrial production and Empire manufacturing, and better Philadelphia Fed business outlook. That’s not a recipe for a big move in equities either way… futures certainly didn’t care when these numbers came out. The market opened up about 15 handles, fell to down 10 at11 AM
and then rallied without looking back from there.The knee-jerk dip-buying continues. For the moment, they are winning too. I don’t know when they’ll run out of capital or willpower. I am fairly confident that buying only because today’s prices are lower than prices two weeks ago isn’t a good strategy. I wonder how badly the market has to re-correct to expunge that behavior from the market….
Let’s forget about valuation and all that jazz. Let’s just talk about behavior. The investing public has been strongly conditioned to buy dips. It started after the ’87 crash. All of us know that when things get really insane, we *should
* jump in with buy orders. (That’s easier said than done and is also a dangerously naïve rule but I digress….)So other big market corrections have reinforced this near-religious belief that buying US equites after a selloff is the most important investing behavior one can have. Here are just a few other lessons from history.
- 1998 Russian Default/Long Term Capital Management crisis
- S&P dropped 22% in two months
- S&P recovered it all in two months
- 2000-2003 bear market (dot-com implosion, 9/11 attacks, Iraq War)
- S&P dropped 50% in three years
- S&P recovered it all in 4 years
- 2008 financial crisis
- S&P dropped 54% in 10 months
- S&P recovered it all in 3 ½ years
Those are the big ones. And every dip since the crisis has reinforced the lesson. Buy the dip… buy ANY dip. Don’t think, just buy!
We are all have the same behavior too. For all my valuation-bearishness, I’m looking to buy the dip! I’m just looking for a bigger dip than the market is providing!
Here’s the larger danger. Markets are orderly only when you have two sides… we are getting to a point where *everyone
* is a dip-buyer and there’s a race to rush into the dip and then chase the tape higher. That behavior is a crowded trade… If everyone is doing it…what’s going to happen when it ceases to work?No strategy can work if everyone follows it. A recent example involves a lot of hand-wringing and finger-pointing when it comes to the XIV exchange-traded note. It blew up recently. It went from 98 to 6 overnight. No need to get into the under-the-hood details. That’s not the point.
The point is that it blew up because it was a crowded trade (too crowded for that particular market). The trade started to go bad, liquidations happened, the exit was too narrow to let those investors out, prices moved far and fast, which triggered more liquidations/trades, and the whole thing continued from there until almost everyone was squeezed out and broke.
That’s not a new process. Crowded trades going the wrong way and cascading into huge losses for everyone is a risk, in almost any market.
How crowded is the trade relative to the market? That’s the most important question.
When investors the buy-the-dip reflexively, I worry about what could go wrong.
This is a *behavior
* concern, a *group-think
* concern, an *act-without-thinking
* concern. The market is exhibiting a lot of monkey-see, monkey do buying. It’s been working without fail for decades. It’s been on steroids since ’08.To flush this behavior out of the market…what’s it going to take?