Churning Stocks Dealing Swift Punishment to Anyone Who Dares Buy

(Bloomberg) — Trying to pick the bottom in stocks every time they fall is proving costlier this year than any time since the 1970s.

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Beset with slow and steady declines spread out over days and sometimes weeks, investors are being shaken out of their dip-buying stupor. In 2022, the average drop in the S&P 500 has lasted roughly 2 1/2 days, more than any year since 1974, while its returns following down sessions have been negative 0.2%. That’s also the worst in almost five decades.

In short, the bullish impulse is being wrung out. Investors were pummeled by a confluence of worrying developments Tuesday, among them squishy guidance at industrial bellwether General Electric Co., worsening Covid trends in China, the dollar’s fourth consecutive daily gain and a report showing a weakening in consumer confidence. The Nasdaq 100 Index bore the brunt, falling more than 4% to the lowest in 11 months. The rout continued after hours as disappointing earnings from Alphabet Inc., Microsoft Corp. and Texas Instruments Inc. rattled investors.

“It’s trading like a bear market,” said Brian Donlin, an equity derivatives strategist at Stifel Nicolaus & Co. “Rallies are sold pretty aggressively, and bounces are smaller and smaller.”

Churning losses are a relatively new experience for U.S. investors conditioned by past success hunting bargains. Four months into 2022, the S&P 500 has made 17 separate year-to-date lows — the most over comparable periods since 1977.

That’s a stark departure from the past decade, when all but one year saw the equity benchmark rising on average after a down day. Many factors may have underpinned the shift, though behind at all is the Federal Reserve.

After coming to the market’s rescue at almost every sign of trouble since the financial crisis, the central bank is showing no such sympathy as it rushes to tamp down inflation. Fed chair Jerome Powell raised interest rates in March, marking the first time since at least 1994 that a hiking cycle started within a month of a major equity selloff.

With the policy of quantitative easing being replaced by the Fed reducing its balance sheet, the central bank has ceded its role as the bull market’s ally and become its largest threat.

As bond yields head higher, one big bull case for equities — the idea that investors have no choice but to own stocks, sometimes abbreviated TINA for “there is no alternative” — is in jeopardy.

“At what point do higher fixed income yields create a decent enough alternative?” Tony Pasquariello, a partner at Goldman Sachs Group Inc., wrote in a note Friday. “The QE party has ended, the QT era is very soon to begin, and we’ve clearly transitioned to a regime of much higher volatility.”

Wild price swings are already a signature feature of 2022’s stock market. The S&P 500 has swung at least 1% during 86% of the trading sessions, on course for the wildest year since 2009, data compiled by Strategas Securities show.

That, along with persistent losses, seems to be finally taking a toll on sentiment. Investors, who went bargain hunting during the first quarter are fleeing stocks at the fastest pace since at least 2015. Almost $26 billion has been pulled out of equity-focused exchange-traded funds this month, according to data compiled by Bloomberg.

While some of the outflows from ETFs including Vanguard S&P 500 ETF (ticker VOO) and iShares Core S&P 500 ETF (IVV) may be tax-driven, sentiment may be the reason behind outflows in Financial Select Sector SPDR Fund (XLF) and iShares Russell 2000 ETF (IWM), according to Bloomberg Intelligence’s Eric Balchunas.

Not everyone is giving up on the time-tested dip-buying strategy. JPMorgan Chase & Co.’s Marko Kolanovic, one of the staunchest bulls among Wall Street strategists, on Monday urged clients to add stock holdings, saying the market is likely to rally in the coming days, reversing losses from the previous week.

As rewarding as it looked since the pandemic bottom in 2020, when stocks embarked on a staggering 99% rally over two years, bottoming fishing is getting risky. After a brief respite earlier this month, stocks resumed their carnage, with the S&P 500 approaching its low for the year and the Nasdaq 100 back to where it was in May 2021.

While it is likely bulls will eventually reap gains in the long run, the market’s inability to stem the bleeding can be nerve wracking. All year, investors have been battered by prolonged declines, with the S&P 500 posting four separate stretches where it fell at least four days in a row — a rate that if sustained would make this year the worst for bottom feeders since 1984.

“Undoubtedly the feel of the market has turned. This is an equity market where it is more profitable to sell into strength,” said Peter Chatwell, head of multi-asset strategy at Mizuho International Plc. “We expect this bear market to remain in place through Q2 and, only if the inflation risks have shown material signs of having peaked, can this turn into a slight risk rally in H2.”