‘Can’t Lose’ Mentality Puts S&P 500 In Bigger Trouble, Says BofA

(Bloomberg) — The S&P 500 index has managed to stay above its recent low amid renewed sell-off, but Bank of America Corp. urges investors to remain wary.

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The dip in the benchmark on September 20 and the subsequent rapid rebound late last week reinforced the notion that 2021 is a perfect year to buy the dip. On average, the S&P has taken 4.6 days to fully recover from a significant decline, which BofA defines as a two-sigma event. That’s the fastest since the company’s records began in 1928.

A sign of market resilience? Could be. But for BofA strategists, including Gonzalo Asis and Benjamin Bowler, it really is a testament to the market’s fragility. The dip buying mentality prevalent among investors is setting the stage for bigger problems, they warn, especially as the Federal Reserve plans to cut monetary support and Covid variants continue to spread.

“Moral risk and a ‘no-lose’ attitude on the part of investors only increase the risk of a larger vulnerability shock before the end of the year,” the strategists wrote in a client note on Tuesday. “Adding even more uncertainty to the outlook is the impending run-down of the Fed and the general hawkish turning away from the measures triggered by the Covid shock.”

The strategists joined their Morgan Stanley counterparts to urge investors to remain vigilant after last week, when the S&P 500 reversed losses and broke through two weeks of declines.

Shares fell for the second day on Tuesday, with tech stocks leading the decline amid a spike in government bond yields. The S&P 500 lost 3.7% in September, putting it on track for its worst month in exactly a year.

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