One of the most effective short-term trading strategies of the past few decades is making a major comeback in 2023 after yielding losses for investors in 2022.
Buying the dip — that is, buying stocks the day after a selloff — is yielding some seriously strong gains for investors in 2023, according to a team of analysts led by Benjamin Bowler, the head of global equity derivatives research at Bank of America Global Research.
Average one-day returns for the S&P 500
SPX,
the day after a selloff have climbed to nearly 0.3% in 2023. That means the strategy is on track for its third-best average return ever for a calendar year, and its strongest since 2020.
Major equity-market indexes like the S&P 500 and Nasdaq Composite
COMP,
have seen gains in 2023, thanks in large part to the performance from a handful of megacap technology stocks and other tech and semiconductor names.
These stocks have benefited from a surge of interest in artificial intelligence, a trend that has propelled chip maker Nvidia Corp.
NVDA,
up 164.6% this year.
As a result, the S&P 500 is up 11.8% year-to-date, according to FactSet, following a pullback of 19.4% in 2022, the worst yearly performance for the index since 2008. The Nasdaq, which is more heavily weighted toward highflying tech names, is up 26.3%, according to FactSet.
Buying the dip gained widespread popularity as a strategy for short-term traders during the years following the financial crisis of 2008 as U.S. stocks trudged ever higher while the Federal Reserve and other global central banks kept interest rates anchored at rock bottom, or even negative, levels.
The strategy even became the focus of a popular, if mildly profane, YouTube video that went viral back in 2014.
But even before that, the strategy often paid off. In April, a team of analysts at Bespoke Investment Group found that since the creation of the SPDR S&P 500 ETF Trust
SPY,
a pioneering ETF that allows investors to easily and cheaply trade the S&P 500, buying the S&P 500 the day after down days has yielded returns of roughly 740%.
See:These are the times when buy-the-dip works — and Wednesday fits the criteria
The strategy broke down in 2022 as investors endured wild swings as stocks moved steadily lower. Since then, several factors have helped the strategy regain some of its lost luster, according to Bowler and his team.
“Equity investors’ eagerness to buy the dip never went away with last year’s selloff and is now being fueled by a narrative of ‘Fed done, inflation out of the way, recession postponed,’” they said in a note to clients shared with MarketWatch.
“Add to this the successful debt ceiling extension, the AI boom, and relatively low equity exposure, and you get a powerful recipe for near-term upside.”
Dip buyers are once again making good on Thursday, as the S&P 500 and Nasdaq rebound from Wednesday’s pullback. All three major U.S. equity indexes were trading in the green Thursday afternoon, with the S&P 500 up 0.6%, the Nasdaq up 0.9%, and the Dow Jones Industrial Average
DJIA,
the only one that finished higher on Wednesday, up 183 points, or 0.5%.
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