Buying the dip is alive and well.
The market came roaring back this past week after suffering its worst week of 2019, even though it had every excuse to keep falling. The Dow Jones Industrial Average rose 398.63 points, or 1.6%, to 25848.87, while the S&P 500 gained 79.41 points, or 2.9%, to 2822.48, and the Nasdaq Composite surged 280.39 points, or 3.8%, to 7688.53.
Good luck finding a reason why. The week began with news of the tragic crash of a Boeing 737 MAX 8 jet in Ethiopia that killed more than 150 people and ended with President Donald Trump making ambiguous comments about the state of trade talks with China, with dribs and drabs of so-so economic data along the way. The New York Fed’s Empire State Manufacturing Index came in at just 3.8 in March, for example, well below economists’ forecasts for a reading of 10, and February’s industrial production rose just 0.1%.
When fundamentals don’t seem to be moving the market, we look to the charts—and technically, the market has a lot going for it. The S&P 500 finished the week at its highest close since Oct. 9, well above the 2803.69 that marked its March 1 high. But a bigger reason for optimism might be that bearish patterns haven’t turned into bigger selloffs, says Nomura Instinet’s Frank Cappelleri.
He watches a “Bear Oscillator,” a measure that keeps track of whether bearish market patterns translated into selling, rated on a scale of one to 10. For much of 2019, the oscillator has remained at three or below, a sign that “no bearish pattern has been strong enough to achieve its downside target in nearly three months,” Cappelleri says.
We’re not without worries, of course. If the U.S. and China fail to reach a trade deal, the market will likely take a hit, while weaker-than-expected economic data and earnings could offer fundamental reasons to sell. On the technical side, small-cap stocks have underperformed large-caps, and breadth hasn’t been as strong as it should be, says John Kolovos, chief technical strategist at Macro Risk Advisors. “Large-cap is an isolated breakout,” he says.
Still, Kolovos is sticking with his 3065 target on the S&P 500. Part of the reason is that so many investors have been reluctant to trust the current rally. The higher the market goes, the more they will have to consider buying in. “The pain trade is higher, not lower,” he says. “We’ll let the market dictate what’s going on, and then let the narrative fall into place.”
The dominant narrative, of course, is that the U.S. is teetering on the edge of a recession that could occur next year, if we’re not already in one. But slowdowns usually come after periods of excess, notes Torsten Sløk, chief international economist at Deutsche Bank, and he sees few signs of them. “You worry when everyone is saying hooray and taking champagne bottles out,” he says. “At the moment, it feels like the champagne bottles are still in the freezer.”
But what if it’s the other way around? While much of the recent economic data has been weaker than expected, Sløk, for one, is seeing very early signs of a possible recovery.
For instance, the weekly Harpex Shipping Index, a measure of container shipping volumes, bottomed in late January and has been pointing higher since then. Likewise, the Bloomberg Base Metals Spot Price Index has gained 6.8% this year, and the Baltic Dry Index has started ticking higher as well.
“We are seeing green shoots,” Sløk says. “That means we could see some support for the economy and support for earnings.”
If he’s right, we’ll look back on this period and wonder why we weren’t buying the dips all along.
Write to Ben Levisohn at Ben.Levisohn@barrons.com