The dip-buyers across the ETF world have vanished after seeing their account balances ravaged too many times in the 2022 meltdown.
Three times, to be specific. That is the number of 5% bounces that have failed to endure in the S&P 500 this year - luring billions of dollars to exchange-traded funds in every rebound. As the S&P 500 jumped more than 6% from its 2022 trough, approximately $10 billion was pulled out of equity funds, according to data compiled by Bloomberg.
The bearishness has been prescient this week as the selloff resumed in earnest, with the S&P 500 sinking 2% on Tuesday.
The outflows show that investor sentiment is souring after the successful strategy of buying the dip cratered.
In the last two weeks, hedge funds tracked by Morgan Stanley have slashed their equity exposure to the lowest level since 2009. Retail investors gave up on their long-held bullish stance, selling shares at the fastest pace in almost two years.
The bearishness may set the stage for what the contrarians view as a sustained recovery. It shows growing trepidation that any bounce is nothing but a bear-market rally, with the Federal ReserveFederal Reserve committing to the most aggressive tightening cycle in decades to fight red-hot inflation.
David Donabedian, chief investment officer at CIBC Private Wealth Management, said in an interview that buy-the-dips is a good strategy when the Fed is easing and injecting liquidity into markets. In a tighter Fed tightening mode, sell-the- rallys is a better trading strategy. I don't think we have seen the lows of the bear market yet. The tech megacaps bore the brunt of the selling on Tuesday, as the Nasdaq 100 plunged more than 3%, extending its 2022 loss to 29%. The S&P 500 is stuck in its second bear market since 2020, down more than 20% from its January peak.
The lack of inflows into stock ETFs is a departure from May, when traders poured $30 billion into the funds during a 7% market bounce. In March, there were $42 billion inflows, while more than $5 billion was added in January.
All these attempts of bottom-fishing proved futile as the S&P 500 reversed its course, hitting fresh lows one after another along the way. The recent rip has caused the stock-market bottom feeders to dodge this latest slump.
Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, said investors are increasingly worried about a recession and are dusting off their bear-case scenarios. He said there was a reassessment of the Fed, which was right or wrong, referring to the risk that the central bank will fight inflation at all costs, even if it is at the expense of growth.
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