Will “Rebalancing Day” Make Stocks Rise?

Stocks are stalling today after rising again on Monday. If the market tumbles, it could potentially re-test its low from last week, scattering bulls to the wind in the process.

Investors are watching the major indexes nervously as a result.

But what they (and plenty of analysts) are also waiting for is something else entirely; a “buying frenzy” caused by investment funds.

Over the last few weeks, stocks shrunk in the COVID-19 crash, prompting pension funds (and others) to switch to skyrocketing bonds. Now, these funds are completely out of balance, mostly tilted toward the bond side.

Eventually, they’ll sell bonds and buy stocks in a rebalancing effort. Some investors seem to think today – the end of the month and first quarter – is the day.

“The rebalancing story is something everybody is watching very closely. It might help temporarily prop up some asset prices, either directly or via the expectations it might happen,” Jon Hill, senior BMO rate strategist, said.

“The question is what happens April 1? I think this is a second-order factor, but everybody is trying to rebalance everything they’re doing. I’m not sure that leads to a huge flood into equities just because of the state of market uncertainty.”

It’s true that uncertainty is still front and center in the minds of investors.

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Fund managers especially.

But that doesn’t mean funds won’t take advantage of a sunken market that’s down 20% from its all-time highs in just six weeks.

“We think there’s an element of people positioning themselves for a big buy,” remarked Julian Emanuel, chief equities and derivatives strategist at BTIG, when asked about the rumored rebalancing act.

“The best, ideal scenario […] would be for nothing to happen in markets. Everybody’s on a hamster’s wheel in light of the rally last Tuesday, Wednesday and Thursday. What you really need is a couple of days for both buyers and sellers to catch their breath. […] What you need is several days of calm so people can reassess instead of this utterly frantic feeling to the downside and the upside. Coming out of the pension rebalancing is a very good time.”

Emanuel continued, adding that the rebalance may have already taken place.

“In theory, they say that kind of thing is supposed to happen at the close tomorrow but in practice, it very rarely turns out that way,” he said on Monday.

“Our mantra has been to buy weakness. Do not chase strength. Could you get a retest of the lows in the next few weeks? You absolutely could.”

“Buying weakness,” as Emanuel put it, is the preferred method of many other Wall Street strategists, too. That means they likely purchased billions of dollars’ worth of stock right when the crash began. Warren Buffett, the Oracle of Omaha himself, told investors they’d be stupid not to double down on their losing positions.

Then, the market dropped another 25%.

In essence, Emanuel and his colleagues have subscribed to the crude “buy the dip” mindset. Historically, it’s worked out. The stock market has risen throughout its life span.

But trying to “catch a falling knife” while it’s dropping – like funds did back in late February – will usually end in tears after the first few (failed) attempts. Wall Street almost goaded the market into a recovery in early March by “buying weakness,” only for stocks to tumble further, exacerbating losses.

It’s much, much easier to buy with the trend, not against it, once it forms. Best of all, you don’t need a crystal ball (or legions of high paid analysts) to succeed that way.

All it takes is a simple, time-tested trading method and a small dose of common sense; the latter being in woefully short supply these days. If you can combine both, you’ve already got a major leg-up on 99% of investors.

“Buy the dip” money managers included.

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