Yes, This Counts as Big “Buy the Dip” Action

Among the most important of this month’s headlines are those that describe the poorly received earnings reports of key semiconductor memory stocks, particularly those in Sandisk (SNDK) and Western Digital (WDC).  Both stocks opened with double-digit percentage declines despite the now-usual refrain that they beat consensus estimates for revenues, earnings, and guidance but not by enough to satisfy the most enthusiastic investors.  To my mind, the bigger story is the intraday rallies that occurred in these stocks after significant initial shakeouts.  This fits with the broad market mindset shown in major index options.

As I type this, it’s not as though either of these stocks is trading higher, but they are far, far above their early lows.  WDC was down by as much as 21.5% shortly after the opening bell rang, and it is now “only” down by 8.5%.  The moves in SNDK were not quite as dramatic, with a maximum drop of 13.8% before bouncing back to a relatively staid 3% decline.

2 Days, SNDK (2-minute bars), WDC (purple line)

Source: Interactive Brokers

Because these stocks were caught up in the blowup at Situational Awareness, they’ve had quite a wild couple of weeks.  Today’s moves seem relatively tame by comparison when we look at a two-week chart of these two stocks.  Interestingly, both are roughly back to the levels that prevailed two weeks ago.  They are also roughly the levels that prevailed three months ago.

2 Weeks, SNDK (10-minute bars), WDC (blue line)

Source: Interactive Brokers

6 Months, SNDK (daily bars), WDC (blue line)

Even a cursory glance at the prior charts shows not only the stellar returns for both these stocks, even though both are currently well below their peaks, but also the volatility that has been a constant factor since their advances took an even sharper leg higher in early May.  Note also that even as these stocks fell relatively steadily and aggressively, there were numerous significant rallies amid the steep downtrends.  Dip buying remains a key source of activity, even if it results only in countertrend moves.

To my mind, this is reflective of the overall approach to risk that has pervaded the general market mindset.  My friend Henry Schwartz at the Cboe, widely viewed as one of the best, if not THE best, compilers and interpreters of options market data, posted the following on LinkedIn yesterday.

Source: LinkedIn

I don’t enjoy dwelling on a single statistic as the basis for a major market call, but the current near-record low level of the S&P 500 (SPX) put/call ratio amid a multi-year trend of lower readings requires some consideration.  It is indisputable that bullishness is quite well-ingrained in the market’s mindset.  This is reflected in the ever-shorter and ever-shallower dips in key indexes, and by the relatively violent reactions when good news justifies an upward revaluation.  We don’t need to look further back than last week for moves of that type, when SPX mounted a nearly 5%, four-day rally that took the index to a fresh new high. 

I couldn’t resist offering a response to Henry’s request for folks to weigh in.  My take was this:

Again, I won’t let a single data point, one that is typically viewed as a contrarian indicator, define whether we are over-extended, let alone near a market top or turning point.  But I do think it’s fair to note that we have seemingly changed our general perceptions about whether major index options are better utilized as tools for speculation rather than risk management.  It is, of course, possible that this change does involve risk management, but the risks being managed are those of underperformance rather than concerns about losses.  We’ve become increasingly conditioned to perceive downside, or “left tail,” risks as shallow, easily managed opportunities for more profits.  So, why hedge them if we only ever go up, right?  And, let’s hedge the more tangible risk of missing another rally, right?