Traders have been taking advantage of share weakness to "buy the dip," or expand positions by purchasing shares at a discount. And that's helped the equity market recover from short-term selloffs faster than ever before.
The dynamic was on display just last week, when the S&P 500 fell 1.8% in a single day, which marked a five-standard-deviation move. The index recovered 85% of that loss over the following three days, the second-fastest retracement of a loss that big in S&P 500 history, according to data compiled by Bank of America Merrill Lynch.
"Market shocks have come to be viewed by investors as alpha opportunities rather than marking the onset of rising uncertainty."
Still, it's a bullish signal that stock investors have been so quick to support the S&P 500 immediately following these patches of weakness. And they have plenty to be confident about — most notably corporate profit expansion, which has historically been the biggest driver of share price appreciation.
The future of dip buying is where it gets tricky. With the US stock market still in the throes of a more than eight-year rally, the following question must be asked: are investors so willing to buy the dip because we're in a bull market, or are we in a bull market because of dip buying?
Source: Bloomberg Pro Terminal
Trader Bozhidar Arabadhziev
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