Blog Hero Image

Posted by Craig Basinger on Dec 6th, 2021

Buy the Dip Is Alive and Well

Over the past year, equity investors would be hard pressed to find anything to complain about.  Even without dividends, the S&P 500 is up 24%, the TSX has risen 19% and global equities are up 18%. Even better, periods of market weakness have proven shallow and short. Just look at the S&P 500, with six occasions that witnessed the index pull back more than 2.5%, the depth of the damage maxed out at 5%, and were often over in the span of a couple weeks.  This has certainly emboldened investors to buy the dips in the market. Naturally, one of these pullbacks will develop into something more material, but, so far, the buyers of the dips have been rewarded and continue to come back in. Recency bias will bite them at some point. The TSX and global equities have similar patterns.

October 2020 to November 2021 Drawdown from highs

Pullbacks have been extending

It’s worth noting that the pullbacks have been getting larger and longer as the past year progressed. The September decline lasted a month!! Yes, a month went by without the market making a new high but then concerns over Delta faded as did talk of Evergrande. And now we sit down about 4%, this time its Omicron and increased concern over the speed of the Federal Reserves taper. Could this be the start of an actual correction (i.e., a pullback of 10% or more)?..

Sentiment has soured

The American Association of Individual Investors’ weekly poll was released on Thursday and the percentage who see the market rising over the next six months has dropped from over 40% a month ago to 27%. Meanwhile, the percentage who are bearish did the opposite, rising from 26% to 42%. When the bears minus bulls is 20 (it’s currently 15), we would say sentiment has reached an extreme…so we’re not there, yet. Note that reaching a contrarian market sentiment is a positive indicator.

ETF flows continue

Regardless of these bearish survey takers, dollars matter more when it comes to the markets. We won’t go into why surveys are not the best indicators of actual behaviours—that is a whole different Ethos. What we can see is that with markets down a few percentage points—and the last time the S&P 500 made a new high a whopping 10 days ago—money flows into ETFs have moved higher. The last week has seen over $10 billion of net buying, when measuring equity ETF flows based on all North American ETFs with assets of over $1 billion. While ETF flows may not be as clean an indicator of retail investor trading as they used to be, given more institutions are using these vehicles, they remain a decent gauge. What does this mean? The people may be more bearish, but clearly a sufficient amount are bullish enough to be buying.

October 14, 2021 to December 2, 2021 Equity ETF flows (in billions)

Investment implications

The markets are certainly wrestling with some issues at the moment.  The uncertainty of the new Omicron variant remains the most talked about issue with key determinants being how contagious will it be—both among the vaccinated and those who are not—and how severe will the symptoms become. Over the next few weeks, as science uncovers more evidence on these two big questions, the news flow will likely drive markets. But don’t forget the Fed and other central banks—the global tightening cycle appears to be getting started, and this pullback may prove to be yet one more buying opportunity during this great run. Alternatively, it could be the start of the correction that so many have been waiting for. The fact that so many appear to be waiting for weakness is a positive.

— Craig Basinger is the Chief Market Strategist at Purpose Investments

Get the latest market insights to your inbox each week from Craig Basinger.

Sources: Charts are sourced to Bloomberg L.P.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Craig Basinger

Craig Basinger is the Chief Market Strategist at Purpose Investments. With over 25 years of investment experience, Craig combines an educational foundation in economics & psychology with years of experience in both fundamental and quantitative research. A long-term student of the markets, Craig’s thoughts and insights can be seen in his Market Ethos publications and through his regular contributions on BNN.

Craig and his team bring a transparent and cost-efficient approach to investment management. The team provides asset allocation OCIO services and directly manages over $1 billion in assets. The team manages dividend mandates, quantitative risk reduction strategies and asset allocation services.