“Pretty Much Every Client We Talk To Wants To Buy The Dip, And That Is Not Comforting”

In the past few days there has been much speculation that in light of the violent reversal in stocks following the early Coronavirus scare and subsequent rebound, that investors were positioned extremely bearishly and were caught offside, forced to once again chase stocks higher amid a general short squeeze. While that may indeed be the case, especially considering the violent move higher in most shorted stocks, a note from Citi’s Tobias Levkovich indicates the opposite, namely that far from bearish, “pretty much every clients wants to buy the dip”, which “implies that people are very long the market and are willing to let share prices to go higher.“

We agree, as this clearly suggests that not only are most investors not bearish, but they don’t consider even a potential global pandemic as a reason to sell off stocks, and use any catalyst to chase risk.

Pretty much every client we talk to wants to buy the dip, and that is not comforting. It implies that people are very long the market and are willing to let share prices to go higher. When we are asked what factors made the Panic/Euphoria Model move into euphoric territory, we highlight one of the inputs (though several caused the shift), as it looks at premiums paid for puts versus calls, and the prices have dropped for puts. Fewer deem the need to pay up for insurance, which indicates substantive complacency. Accordingly, the qualitative/anecdotal evidence is supporting the more quantitative approaches.

Source: Scott Barlow