‘Nervous Reactions Will Be More Frequent’: Lessons From 2018’s Two Selloffs

In the foreword to their Q2 outlook, Barclays describes a phone call with an “exasperated” client who in late January was desperate to buy a dip that wouldn’t come.

How, he wondered, does one buy the dip if stocks only keep rising?

Well, “one” doesn’t. Rather, “one” is relegated to buying on any momentary, fleeting weakness or, more simply, one is left to buy “blips”.

How did we get to that point? Well, we’ve explained that on a number of occasions. Consider this excerpt from a February piece on market fragility:

The increasing rapidity with which intermittent flareups collapse has been a defining feature of markets over the past couple of years and this dynamic has become especially prevalent since Brexit.

Part and parcel of that dynamic is the idea that the central bank put has become self-sustaining – it runs on autopilot. Why wait on dovish forward guidance (or any other signal from the monetary gods) to buy the dip when you know with absolute certainty that in the unlikely event a drawdown proves to be some semblance of sustainable, policymakers will calm markets? If you know it’s coming, well then you should buy the dip now. This becomes a recursive exercise as everyone tries to frontrun everyone else and before you know it, dips and vol. spikes are mean reverting at a record pace as the prevailing dynamic optimizes around itself.

That was already operating by the time the Trump tax cuts were introduced and when January rolled around, the tax cut optimism collided with optimized dip buying and retail euphoria (e.g. millennials dumping money into E*Trade accounts, at least according to anecdotal evidence) and you ended up with frustrated Barclays clients searching in vain for entry points.

We haven’t checked back with him, but we assume market complacency is no longer his biggest concern.

Needless to say, the client Barclays describes needn’t have been concerned. There was a dip to buy in February and if he missed that, there was another one two weeks back and a pretty precipitous drawdown in FANG this week (although it was partially recouped on Friday).