- JPMorgan (NYSE:JPM) says a tried-and-true strategy that has supported the almost nine-year bull market is showing signs of fading.
- The firm is particularly troubled about a lack of liquidity, which it says is making investors less nimble and exacerbating market moves.
For most of the almost nine-year stock bull market, investors have viewed weak stretches as opportunities to increase exposure.
And can you blame them? The equity market has made a habit of snapping back quickly following sell-offs, which has emboldened traders to buy more on declines, thus perpetuating the cycle.
Well, enjoy this "buy the dip" strategy while you can, because it's showing signs of fading, JPMorgan says.
The firm is specifically perturbed by the "erratic" behavior of retail investors last week, when the benchmark S&P 500 dropped 2%. Rather than seeing a steady stream of inflows amid the selling, the direction of the money trail was inconsistent at best, according to JPMorgan.
This trend "casts doubt on the idea that retail investors will serve as the marginal buyer of equities in the current conjuncture," Nikolaos Panigirtzoglou, a global market strategist at JPMorgan, wrote in a client note. "The potential withdrawal of retail investors as the marginal buyer of equities could create clear downside risk for equity markets for the near term."
Of particular concern to JPMorgan is the $100 billion that poured into equity exchange-traded funds in January. With traders already so heavily invested in stocks heading into what was a turbulent February, the firm fears traders may not have enough dry powder to sustain a buy-the-dip strategy.
JPMorgan is also perturbed by what it sees as a lack of investor liquidity, which it says stems from a defensive stance being adopted by market makers. The firm argues that their hesitance to put money to work worsens liquidity, which in turn makes volume thinner, thus exacerbating any price moves that do take place.
But what about buybacks, which were just highlighted by one of Panigirtzoglou's JPMorgan colleagues as potentially underpinning further stock strength?
Let it be clear that Panigirtzoglou isn't arguing repurchases will be futile — he simply thinks they "might take some time to materialize," depriving the market of a backstop that has proved crucial throughout the bull market.
With all of this in mind, it's important to note stocks could continue exhibiting strength, even without the same buy-the-dip mentality as before. But such buying will have to be catalyzed by fundamental drivers rather than by a sentiment-driven knee-jerk reaction.
Assuming Panigirtzoglou is correct, how will the market handle resting on its laurels? That's a question investors will have to answer for themselves as the bull market trudges on.