Very interesting take on the markets:
To Buy The Dip Or Not To Buy The Dip, That Is The Question
In the post linked here at the outset, I mentioned a Friday note from JPMorgan's Nikolaos Panigirtzoglou, who pens the bank's popular "Flows and Liquidity" series. I meant to elaborate on that over the weekend, but I never got around to it, so I wanted to mention it here.
Panigirtzoglou concurs with his colleague Marko Kolanovic that the systematic selling has likely run its course (or at least that some of that risk was shaken out last week). But he flags a series of "positioning related" risks to U.S. equities going forward. As I mentioned on Saturday, these are not new, but they are updated, so I wanted to briefly run through them.
First of all, short interest on the NYSE isn't really that elevated, and while the latest data is current only through late last month, Panigirtzoglou says JPMorgan "doubts that [last] week's correction has resulted in the emergence of a new large short base in US stocks."
(JPMorgan)
Next, Panigirtzoglou reiterates a point he made earlier this month about a perceived lack of hedging. Specifically, he notes that put to call open interest for S&P options is "either at or below average levels".
(JPMorgan)
And then there's retail investors who, Panigirtzoglou reminds you, are still leveraged to the hilt. To wit, from the note:
Leveraged US retail investors have yet to unwind the record high leveraged positions in US stocks they had built up until May via their margin accounts. This is shown in Figure 9. Admittedly the last observation in Figure 9 is for the end of August but we doubt that this metric declined enough during September/October to allow us to argue that this source of vulnerability is no longer present.
All of that would appear to suggest a lack of capitulation and argues (perhaps) for further caution going forward.
The takeaway from all of this is that whether you buy the dip now largely depends on what it is you're concerned about.
If you're worried about a continuation of the forced de-risking we saw last week, those worries might be overblown, although, for the thousandth time, that depends entirely on whether some exogenous catalyst pushes momentum signals through key triggers and/or drives the market through key options strikes. Additionally, if volatility remains elevated, vol.-targeting funds could continue to see pressure to deleverage, adding to the systematic overhang. But those caveats aside, things are "cleaner" than they were headed into last week.
If, however, you're worried about the overall macro picture (e.g., rising rates, the Fed, the trade wars, etc.) and/or a lack of capitulation from less esoteric measures like those mentioned by JPMorgan's Panigirtzoglou, well then now might not be the best time for dip buying.