Fear and Greed: Buy the Drop into Market Neutral Strategies

Nov 18, 2017 | Economics, Politics

“Greed is Good.” – a phrase made famous by Gordon Gekko, Oliver Stone’s character from the cult classic film Wall Street. Every once in a while an investor will still look to their charts, their reports, and and ask themselves; is greed still good?

Pushing ethics aside, this is Wall Street after all; yes, it is. This week has had analysts and investors on the edge of their seats as Donald Trump’s tax reform bill passed the House of Representatives and the SP500 sprung back after a week of poor performance – seeing 80% of the companies listed on the SP500 in the green.

Several factors were attributed to the rally of U.S. stocks on Thursday, but not all of them make much sense at first. The most obvious and rational factors are bullish earnings reports from Cisco and Walmart, the most anticipated being Trump’s tax reform, and the strangest; a “Buy The Drop” philosophy.

It’s important to note the controversial debate between passive and active investment management. With the expectancy of a pullback in US stocks many investors have adapted a market neutral stance through ETF diversification. While Sanford C. Bernstein & Co once advocated that passive management is worse than Marxism, the company reiterated their claims in October. An important prospectus in ETF management is entry position, and buying at the top when the economy looks to a downturn isn’t the best passive strategy. Although Tuesday and Wednesday saw US stocks in decline many investors stalked the SP500 for a good entry point for a strongly anticipated bull market on Thursday by buying the drop despite little supporting fundamentals. Greed rebounded the US markets, as always, but fear is right around the corner.

Corporate tax cuts have been a crucial part of the Trump Rally – a rise in performance of the stock market fueled by expectations of the tax cuts. The capitalization of US stocks is around 30 trillion USD, and the bill would affect 2 trillion USD. At the same time US stocks haven’t seen a 10% reversal since the Twin Crises, or a 5% pullback since 2015 – while many investors remain bullish of Trumps tax bill saving the market, bears are ready to bring down this tall sequoia. Given that the bill has yet to pass the senate, and a rebuke may send US indices into the anticipated pullback – to the delight of the bears, the upcoming months may be pivotal for US stocks. As much as this rally has been about greed, it has also been very much about fear.

As portfolio selection becomes more difficult it’s due to fear of uncertainty and greed of capital preservation that has investors turn to passive index funds and ETF’s. ETF funds; in their ability to cast aside the heuristics that move the chains of Wall Street, reduce costs attributed both to good and poor decisions, and merely reflect an aggregate market vector – are able to provide an investor with a fair market return in an unstable economy. With fear on the rise, now is a good time to ease into these market neutral strategies.