Saqib, Maiya and David Randall

NEW YORK (Reuters) – Wild swings in stocks are testing the resolve of investors employing one of Wall Street’s most popular strategies: buying the dip.

After the benchmark index entered correction territory on Monday, the Nasdaq was in a bear market for a while before finishing higher. This suggests that the dip buyers are still around despite huge stock declines during the first week of 2022.

While dip buying has paid dividends to investors as stock prices doubled after their March 2020 lows in 2019, bargain hunters face uncertainty over how aggressively Federal Reserve will tighten monetary policies this year. There are also potential conflicts between Russia and Ukraine. And disappointing corporate earnings.

As the equity indexes experienced only a few small rallies, they seemed to be providing good chances to get rid of stocks. They were quickly followed by further declines. Only two days have passed since the Nasdaq rallied more than 1%, after it traded over 20% from Monday’s high.

Katie Nixon is chief investment officer. She stated, “There doesn’t seem to have a lot trust in risk allocations considering the number of uncertainties.” Northern Trust Wealth Management.

According to JPMorgan (NYSE):, traders in options markets were more focused on preventing further falls than on betting on future gains. Retail investors who are often at the forefront of past episodes, dip-buying, have sold a net $2.1 Billion in stocks from Thursday through Monday.

“I don’t think anything the Fed is going to do is going to make the markets happy,” said Louis Gargour, managing partner and chief investment officer at London-based LNG Capital.

The stock market is off to a bad start for 2022. With the Nasdaq falling about 14% from November’s closing high, the Fed’s prospect of tightening faster has prompted a surge in Treasury yields which did a serious blow to Wall Street growth stocks.

An index that closes at 10% below its previous record level is considered a correction, as per a commonly used definition. An index closes below 20% is considered a bear market.

Market participants are closely monitoring the trading of major indexes below their 200-day moving Averages, even though Monday ended higher.

Options market investors have either stayed on the sidelines, or leaning bearish. Cboe Volatility Index rose to its highest levels in nearly a decade.

Overall trading in put options, typically used to place defensive or bearish bets on stock and index prices, outnumbered trading in bullish call options by 1.1-to-1 on Monday – the most bearish that ratio has been since March 2020, according to Trade Alert data.

Chris Murphy, Susquehanna International’s co-head for derivatives strategy, said that “I’m not seeing much along this line of a ‘quick ending to the saleoff’.” “It looks very fearful.”

Moez Kassam is chief investment officer of market neutral Anson Investments Master Funds. He stated that many hedge funds covered bearish equity bets in December when stocks fell, thus depleting fuel which had power past reversals.

According to S3 Partners, financial analytics firm, short interest fell as a percent of float, reaching 5%. This is its lowest point in 4 years. However, the amount of short interest per dollar has increased.

Keith Lerner, Truist Advisory Services’ co-chief investor officer, is taking comfort from the signs of extreme caution. These indicators include the heightened bearishness by individual investors as well as increased demand for downside protection. Both of these indicators have been historically used to indicate market bottoms.

Lerner said that the market’s “risk/reward balance has dramatically improved”, and added that it “is probable within a small percent of finding support.”

Others are cautious. Phil Orlando is a portfolio manager at Federated Hermes and Chief Equity Market Strategist. He would rather wait until Wednesday’s Federal Reserve Federal Open Market Committee meeting to decide his next move.

Orlando stated, “I am not trying to catch a falling blade ahead of the FOMC meeting.”