On Monday, we noted how this week had the potential to be a chaotic one, with about a third of the market capitalization of the S&P 500 (SPX) and about half of the Nasdaq 100 (NDX) indices releasing earnings and an FOMC meeting smack dab in the middle of the week. Throw in the Chinese government causing a selloff after a regulatory crackdown and then a rebound after convening banks to arrest the decline. That certainly sounded like a recipe for volatility. While certain shares did indeed have wild rides, the reality for the broader market proved to be relatively unexciting.

The post-earnings weakness in Amazon (AMZN) notwithstanding, most of the mega-cap tech stocks had a quiet earnings period. Tuesday afternoon was the key, when Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOG, GOOGL) reported earnings in rapid succession. Combined, those 3 stocks alone comprise about 1/6 of SPX and over a quarter of NDX. While there was always the possibility that one stock’s rise could cancel another’s fall, none of them did much to move markets.AAPL closed about 1.2% lower on Wednesday, GOOG was about 0.3% lower after an initial bounce, and MSFT was about 0.1% lower after an initial dip. Despite (or perhaps because of) Chairman Powell’s post-meeting press conference, SPX closed 0.02% lower while NDX overcame the minor falls in 3 of its largest components to close 0.41% higher. 

Stocks got a bit of a reprieve on Thursday when markets cheered the Senate’s approval of an infrastructure bill, but the reaction in major indices was similarly muted. Investors recognized that the bill still needs to make its way through the House, which could be delayed by both infighting and summer vacations. Also, the benefits should accrue over 8 years, which will have far less of an immediate impact than the recent Covid-spurred stimulus packages.SPX rose 0.42% and NDX was up 0.2%. Smaller stocks outperformed, with the Russell 2000 (RTY) adding over 2% between Tuesday and Thursday. That reaction makes sense since the companies in RTY are perceived to be more economically sensitive and had been underperforming their larger peers. 

In Wednesday’s piece, we showed that even during a raging bull market, SPX had fallen in the three-day period including and following an FOMC meeting 9 of 11 times. As of now, that’s 10 of 12, though that can certainly change between now and this afternoon’s close. Whether or not we make it above Tuesday’s close of 4401.46 (SPX is currently at 4396), the pattern is pretty clear. Investors appear to come into an FOMC meeting with relatively high expectations, only to find them either met or dashed, leading to flat to lower indices.

Indeed, most of the action resulted from events halfway around the world. Beijing’s moves to nationalize the education industry led to a double-digit percentage drop in those shares and a wide range of US-listed Chinese companies. The CSI 300 fell over 6% at one point this week, before news that the government appeared to intervene to support the falling markets. There were modest bounces in the indexes and some of the affected shares, which rewarded traders who bought the dip – at least initially.

In yesterday’s video, I noted how “buy the dip” has become a Pavlovian response. This is a learned reflex that has worked spectacularly well for the past decade and certainly the last year and a half for both investors and traders, large and small. There is of course a risk to operating reflexively in a field that demands intellect, but the rewards are far outweighing the risks – at least for now. Buying shares while a central bank or government is intervening has worked spectacularly well for the most part, especially during the past year and a half. Yet many who traded in Chinese stocks are learning the hard way that buying the dip is not always foolproof. 

The most actively traded stock at IBKR over the past 5 days was Futu Holdings Limited ADRs (FUTU). Although Tuesday proved to be a wonderful opportunity to buy FUTU at a recent low, the stock has since given back most of those gains. Furthermore, we see that there have been plenty of dips that have not proven profitable during the past two weeks, as shown by the graph below:

FUTU 2 Week Chart

(Click on image to enlarge)

Source: Interactive Brokers

Yes, there were plenty of ups and downs over this period, meaning there were opportunities for deft dip-buyers to realize short-term profits, the general trend has not been favorable to them. Sometimes we expect volatility but it never arrives. Other times, it can occur somewhat out of the blue. But thanks to traders who have become conditioned to buy dips almost as soon as they occur, volatility has become more muted and fleeting. That can be a wonderful environment for investors, but those of us who have lived through a few market cycles know that quiescent markets typically end with bouts of extreme volatility. The questions of course are when, and at what point the dip really becomes a buying opportunity.