Mark your calendars for Friday Jan. 5. Unless calamity strikes the U.S. stock market, it will mark the longest stretch in history that the S&P 500 or its predecessor hasn’t fallen 5% within any six-month period. The old record, the longest over nine decades, was 394 trading days, according to Goldman Sachs.
Depending on their ideological persuasion, ecstatic investors might thank Janet Yellen, Donald Trump, Barack Obama or just dumb luck for this stretch of extraordinarily smooth sailing. Elevated stock valuations are at least partially explained by fewer pullbacks since behavioral finance teaches us that an asset’s choppiness makes it less desirable and cheaper. Some credit for the calm goes to a group of traders who follow a strategy that goes by the acronym BTFD: “Buy the [expletive] Dip.”
Perhaps because central banks have had the market’s back for nearly a decade, pullbacks have become profit opportunities. The proliferation of investment products that allow individuals to make outsize bets on indexes have given the masses real market heft. Such securities regularly register more volume than all but a few stocks on U.S. exchanges.
One bold trader points out, for example, that, since the advent of central banks’ quantitative easing nine years ago, all you had to do is own the S&P 500 and then double that exposure using leverage at the market close if it dropped at least 1% in a day, holding on for two days. A quick check shows that this has worked well.
Such naive strategies have been almost too successful, though, as there are hardly any dips left to buy. The last time that the S&P 500 lost at least 2% in a session was nearly two months before last year’s U.S. presidential election. There have been only four days in 2017 with at least a 1% drop. That is extraordinary. In the preceding three decades there have been 1% drops every seven or eight trading days, on average, and 2% drops about 10 times a year.
The upshot is that some traders have looked elsewhere for rapid gains. Cryptocurrency exchange Coinbase reportedly has more clients than online broker Charles Schwab. Others are adding to their riskiest holdings, forgetting how much money they can lose.
Traders have been trying and failing to find the Holy Grail of risk-less reward as long as there have been stocks. When an unexpectedly sharp and prolonged market selloff occurs, it will vaporize a good deal of the BTFD crowd’s capital and, along with it, a shock absorber for stocks.
Write to Spencer Jakab at firstname.lastname@example.org