WSJ: “Bottom Fishing” is a “counterproductive” strategy

According to the Wall Street Journal, 2022 is the worst year buying stocks when the stock market fell the most since the 1930s. Some investors said they are still not withdrawing and are implementing a new strategy.

Instead of recovering from a slump, the US stock market continued to fall, causing investors who “catch the bottom” struggling. The S&P 500 fell about 1.2% last week after losing 1% in a day, according to Dow Jones Market Data. This is the steepest decline since 1931.

The prolonged plunge is putting pressure on the popular investment strategy of “bottom fishing”. This strategy was already a great success after the financial crisis and especially during the strong post-pandemic market recovery. Usually, after a sell-off, major indices often peak continuously, which has prompted many investors to think that any decline is short-lived and that it is an attractive opportunity to buy.

Not professional investors, retail investors enthusiastically “bottomed out” even when institutional investors withdrew their money. This positive sentiment plays an important role in market movements and if it “turns around”, Wall Street may be more volatile.

This investment strategy has backfired throughout the months-long market downturn, sending the S&P 500 down 23% year-to-date and preparing to record its steepest year-to-date decline since 2008. The sell-off accelerated last week as central banks around the world simultaneously raised interest rates, leading to sharp volatility in both stock, bond and currency markets. All 3 major indexes of US stocks fell at least 4%.

Many investors have encountered difficulties in the context of high inflation, the Russia-Ukraine conflict has not cooled down. In the coming days, new data on spending and consumer confidence will provide more information about how inflation is affecting Americans’ consumer behavior and how high interest rates will impact the economy.

Recent volatility has caused concern for many investors as they have seen portfolios decline for weeks in a row.

Santi Tafarella, a professor at a community college in Lancaster, California, said: “I was really beaten by the market.” He said he had “bottomed out,” including last Friday, but things didn’t go as well as expected.

Other investors said they are continuing and have not withdrawn money from the strategy, trying to stay stable and pay attention to long-term profits. According to Vanda Research, the market is witnessing 1 trend, which is that retail investors tend to buy more US stocks and ETFs on days when the S&P 500 falls compared to the bullish days.

The trend also took place on September 13, when the S&P 500 fell 4.3% and recorded its biggest drop since 2020. Retail investors bought more than $2 billion in stocks and ETFs that day. They also poured $395 million into the SPDR S&P 500 ETF Trust in just 1 day, the highest 1-day figure this year.

Meanwhile, U.S. households have invested more money in stock-oriented mutual funds and ETFs than they have withdrawn this year. According to EPFR Global data analyzed by Goldman Sachs, U.S. funds received net inflows of $89 billion in 2022. This is the opposite of the withdrawal move of many institutional investors.

However, much of the excitement that enveloped the market in 2020 is gone. The basket of stocks, made up of names well known to retail investors — Tesla, Amazon and chipmakers such as Advanced Micro Devices and Nvidia — have fallen 30% this year. Technology stocks are inherently sensitive to high interest rates and fell extremely sharply.

Meanwhile, intraday trading activity for retail investors fell to its lowest level since January 2020, according to Vanda. Deutsche Bank data shows that retail investor activity on bullish call options has fallen to almost the lowest level in the past 2 years.

Some types of momentum trading , which exploded in the past 2 years, now bring large losses to investors. For example, investing in Cathie Wood’s ARK Innovation ETF is clearly not a wise strategy. On Wednesday, the fund’s stock holdings rose as much as 3.2% as investors flocked in, but fell sharply when the Fed raised interest rates. ARK received $197 million that day, its largest inflow since July, according to FactSet. The fund fell the next day by 4.3% and recorded a double-digit decline for the week.