Bloomberg published an interesting piece this week where they highlight the contrast between retail buying the dip and professionals selling equities. According to Bloomberg, the Bank of America noted that their hedge fund clients sold $4 billion worth of stocks, the most on record.  In stark contrast, retail traders relentlessly bought the dip for the 9th straight week in a row. See the chart below: 

Bank of America fund flows

Who is the ‘smart’ money?

This is interesting. According to the Bank of America, S&P500 returns post big retail inflows have been above the average. On the other hand, the index’s performance is subpar after retail selling. So, perhaps surprisingly, the hedge funds record is slightly worse than the retail crowd’s response. 

Where are stocks a bargain?

The key question on the current dip is how big a dip is a bargain that can’t be missed? The geopolitical risk is usually faded pretty quickly. However, markets are also balancing the risk of stagflationary pressures (slowing growth and rising inflation). This could mean that the Fed is having to hike rates to control inflation just as growth is slowing. This is a bad environment for indices. However, one area stands out as an obvious bargain. That is if the S&P500 can make its way down to 3700. This would represent a nearly 23% fall from recent highs and this is the region of falls that often signal a coming US recession. The significance of this is that it may make the Fed ease up on their hiking cycle if stocks get down there. So, it would be an obvious place for a bottom and many investors would consider this area a bargain. See chart below: 

(Click on image to enlarge)

S&P500 bargain zone at circa 3700 where a US recession could be expected from further falls