Investment Clock insights

We’ve been buying dips in stock markets – how did that turn out?


Hiroki Hashimoto

18 May 2018

Investor sentiment has been fragile since February with the trigger for higher volatility morphing from fear of Fed rate hikes, via trade war, and tech sector concerns, to rising geopolitical tensions. Our contrarian investor sentiment indicator had been flashing a ‘buy signal’, a reading below -1 (chart 1) and we added significantly to our overweight position in stocks during February/March market panics. Since then, we have been gradually taking profits as markets have recovered, benefitting from the strategy of buying the dips. 
Chart 1: Global Stock Prices and Investor Sentiment

Investor sentiment has been fragile since February with the trigger for higher volatility morphing from fear of US Federal Reserve (Fed) rate hikes, via trade war, and tech sector concerns, to rising geopolitical tensions. Our contrarian investor sentiment indicator had been flashing a ‘buy signal’, a reading below -1 (chart 1) and we added significantly to our overweight position in stocks during February/March market panics. Since then, we have been gradually taking profits as markets have recovered, benefitting from the strategy of buying the dips. 

Chart 1: Global Stock Prices and Investor Sentiment

It can pay to buy when others are fearful and this strategy may work in the long run (chart 2), especially alongside a business cycle analysis/strategy such as our Investment Clock.

Chart 2: Long term backtest of contrarian sentiment strategy

The above chart contains simulated performance data. It has been developed using FTSE regional indices and applying the output of these indices to a proprietary strategy based on the RLAM Composite Sentiment Indicator. The data presented in this chart does not represent the actual performance of any past or present fund / strategy offered either by RLAM or any other firm. The returns implied in the above chart are gross of fees and transaction costs which would have had the effect of reducing the actual returns that may have been received. Simulated performance data is not a guide to past or future performance.

The tentative, recent recovery in stock markets has happened despite a rollover in economic activity, especially in non-US regions.  Unsurprisingly,  non-US central banks appear to be adjusting to an easier monetary policy path than otherwise would have been the case. 

A rollover in the global economy, rising inflation and ongoing geopolitical tensions may cause a soggy summer (another reason for some profit taking). However, we think a growth pause, exerting some downward pressure on interest rates,  could also elongate the current expansion further to benefit financial assets in the longer run.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.