(Bloomberg) — One day the post-pandemic stock rally will come to an end. If so, there will be a lot of newly baptized stock bulls involved.
Their refusal to budge has been the stock market’s hallmark for at least 12 months, putting a bottom among four other sales in 2021 alone that look similar to the ones that have made nearly 3% of the S&P 500 index since Thursday. has reduced. Whether the commitment of retail investors is enough to turn the tide is the biggest question in the markets right now.
“There are a lot of very young people in the accumulation phase,” said Dan Egan, director of behavioral finance and investing for robo-advisor Betterment, adding that younger investors, in particular, have been using sell-offs as a buying opportunity. “If they have excess money, they’re going to use it to buy in.”
Four other times this year, the S&P 500 index closed 3% below an all-time high, each time recovering to a record high, according to data collected by Bloomberg. That shows how hard it has been to oust the retailers that have fueled the rally — as well as the conditioning at work in markets that will inevitably come their way.
“The dip buyers intervened very quickly and bought very quickly and that’s one of the reasons we haven’t had a full 10% correction – and frankly I don’t think we’re going to have a correction this time around either, said Randy Frederick, director of trading and derivatives for Charles Schwab Corp. “Every dip is bought and immediately paid off within a week or two, not just where it started, but above that.”
Will this be the lingering sale? Some say yes. Bloomberg stock strategist Gina Martin Adams says big declines in small businesses and transportation companies are particularly bad. “Leading indicators imply that a collapse in stock prices is most likely to continue in the meantime,” she wrote in a note.
Still, it’s been a long time since anything could shake the nerves of the retail cadres that fueled the post-pandemic rally. Predicting that they will stop plowing money into the market has been a lost gamble until now.
Exchange-traded funds are on the cusp of raising more money in seven months than any calendar year ever — with $486 billion in value added in 2021, inflows will soon reach record $497 billion. surpass last year. In July alone, equity ETFs brought in more than $15 billion.
Other signs predict good news for the bulls. A measure of implied volatility in VIX options, known as the Cboe VVIX Index, is trading above 140, the level it has been three times since October and which has become an ultimate buying opportunity. When the so-called volatility of the volatility measure peaked at 152 in late October, it marked the low of the S&P 500 as it began a rally. When it rose to 158 on Jan. 27, the equity meter bottomed out two days later. When the same thing happened in mid-May, the S&P 500 rose more than 1% in each of the next two days.
As the market moved higher, options trading has also picked up again, with strategists from Goldman Sachs Group Inc. last week said the average daily notional amount traded so far has risen to an all-time high. About $534 billion in options have changed hands on average every day this month, more than half of which are in call options. That’s more than last year’s average of about $367 billion.
For many strategists, the current pullback is a blip before reflation trade reconfirms itself. That would mean stocks sensitive to the economic reopening will make a comeback, with cyclical and value-oriented sectors of the market benefiting the most.
UBS Global Wealth Management Chief Investment Officer Mark Haefele wrote in his monthly letter to clients last week that fears of a premature tightening of the Federal Reserve or the spread of the delta variant derailing the recovery are “exaggerated.” Consumers have strong balance sheets, he said, and the need for companies to rebuild their inventories and investments could support economic momentum and corporate profits.
Marko Kolanovic, the chief global markets strategist at JPMorgan Chase & Co., is also among those arguing for such an uptick, arguing that it could happen once fears of delta variants wane and inflation surprises persist.
And Michael Purves, founder and CEO of Tallbacken, on Monday raised his year-end target for the S&P 500 from 4,250 to 4,800, representing a gain of about 13% from current levels.
“We believe that the combination of low and stable interest rates with a strong earnings growth trajectory will support the equity risk premium at a healthy level of 4,800 at the end of the year,” he wrote in a note. “While we are past the peak of earnings growth, the earnings growth story will remain robust through 2022. Furthermore, we find little evidence that an extension of peak profit growth is a reason to sell the market.”
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