Buying on market pullbacks pays off as bulls reign on Wall Street

Investors are getting emboldened in the wake of the unbroken advance in US stocks despite geopolitical crises but traders raise bubble concerns

PUBLISHED : Tuesday, 29 July, 2014, 1:05am
UPDATED : Tuesday, 29 July, 2014, 5:22am

Not since the bull market began has buying dips in the S&P 500 Index been a surer way of making money.

Declines in the benchmark gauge for American equity were lasting an average of 1.5 days in 2014, the shortest since at least 2009, data showed. Starting last year, returns on days after the index fell have averaged 0.13 per cent, the highest since they were 0.38 per cent in 2009.

The ease with which equities are shaking off bad news is emboldening investors and may explain why some of the biggest rallies of the year have come amid geopolitical crises.

While Marc Faber, publisher of the Gloom, Boom & Doom report, says it represents euphoria usually confined to market tops, the strategy worked over the past two weeks amid escalating tensions in Ukraine and the Gaza Strip.

"Folks have been waiting for a big correction for some time now - where is it?" said Brian Barish, president of Denver-based Cambiar Investors. "However horrible it all was from 2007 to 2009, it is now that amazingly bullish."

Rising earnings from Apple, Biogen and Chipotle Mexican Grill last week helped send the S&P 500 to its 27th record high this year.

More than US$15 trillion has been added to United States equity values as the index almost tripled from a 12-year low in 2009, fuelled by monetary stimulus from the Federal Reserve, a five-year expansion in the economy and record corporate earnings.

Losing streaks in the US equity market are getting shorter. The S&P 500 has posted no declines that lasted more than three days this year, compared with an average of nine a year since March 2009.

"Almost any time you see a hint of a pullback in the market, money seems to come flooding in," said Timothy Ghriskey, chief investment officer for New York-based Solaris Asset Management.

On July 10, the S&P 500 fell 1 per cent in the first 30 minutes of trading on signs of financial stress at a Portuguese banking company. Bulls stepped in and the index pared losses during the day. The gauge fully recovered on July 14.

The downing of the Malaysia Airlines aircraft and Israeli military strikes sparked a 1.2 per cent drop in the S&P 500 on July 17. It rebounded 1 per cent on the following day.

The consistent gains have encouraged individual investors to buy stocks. About US$190 billion has been added to equity mutual funds and exchange-traded funds since the start of 2013. That is a reversal from the five years to 2012, when US$300 billion was withdrawn.

"Willingness to buy on a dip implies confidence," said Stacey Nutt, chief investment officer at ClariVest Asset Management in San Diego, California. "It is a sign of economic strength revealing itself in the market."

For other financial professionals, the unbroken advance is stirring anxiety. The market is on the verge of a bubble or is already in one, according to three in five people surveyed in a poll of investors, analysts and traders conducted on July 15-16.

The S&P 500 is about 25 per cent above its peak in 2007 and trades at 18 times reported earnings, near the highest valuation since 2010.

"We are in a bubble," said Faber, managing director of Hong Kong-based Marc Faber. "In a bubble, people are optimistic, there is euphoria about prices going higher and so forth. And that may be possible. The question is 'Are stocks good value?' and I don't think that US stocks are."

The S&P 500 has gone without a 10 per cent loss for 33 months, the third-longest stretch since 1990. On average, corrections have occurred every 18 months since 1946, according to a study by Sam Stovall, chief equity strategist at S&P Capital IQ.

"It's a better environment for long investors," said Dan Miller, director of equities at GW&K Investment Management in Boston.

"Every market drop is going to be met with a new list of buyers coming back to stocks and feeling that they can't afford to miss the next leg of the bull market."