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The Market’s Mantra: ‘Buy The Dip’ – A Catalyst for the S&P 500’s Leap Over a Significant Hurdle

The once prominent stock market strategy, “sell the rip,” that held sway over most of 2022 and into the early months of 2023, seems to have finally given way to the more optimistic approach: “buy the dip”. This observation comes courtesy of a recent note from Tom Lee, the analytical mind at Fundstrat.

This change in market sentiment raises the possibility of the S&P 500 piercing through its crucial resistance level of 4,200, even amidst looming concerns over the impending debt ceiling deadline.

In their analysis, Lee and his team characterized the “sell the rip” period as one where stocks suffer a 2% drop in a week and continue to decline over the subsequent 20 days. Contrastingly, a “buy the dip” environment witnesses stocks retract 2% within a week but recover their losses entirely over the next 20 days.

An intriguing history lesson: since 1928, it’s proven beneficial to remain invested in stocks during a “buy the dip” regime. Such conditions have transpired 60 times, rewarding an average annualized gain of 28%. In stark contrast, the “sell the rip” regime, occurring 30 times since 1928, has typically culminated in an average annualized loss of 25%.

Fortunately for investors, March 23 marked the return of the “buy the dip” mantra in the stock market, according to Fundstrat, setting up equities for potential growth.

“As capital gets invested during market dips, it quickly recovers losses, establishing a positive feedback loop. This was far from the case in 2022, where every 2% dip was met with further selling,” expounds Lee.

The return of “buy the dip” fuels Lee’s belief in the S&P 500’s impending surge past the much-observed resistance level of 4,200.

“Anticipating an upward resolution beyond S&P 500’s 4,200,” Lee remarks, acknowledging the binary nature of the debt ceiling risk. He points out that despite market caution stemming from an upcoming binary event, the case for being overweight in stocks remains compelling.

According to Lee, the mammoth tech stocks are well-positioned to leverage the growing artificial intelligence opportunities, regional banks are primed for a tactical rally, and the S&P 500 presents a reasonable valuation if you exclude the tech giants.

“Equities, in our view, are not overpriced, particularly with the Fed on a pause. Excluding the FAANG stocks, the forward P/E stands at 14.8x. The priciest stocks are staples, at around 20x, and utilities at 17x,” observes Lee.

With this in mind, Lee reiterates his year-end price target for the S&P 500 at 4,750, suggesting a potential upside of about 14% from current levels.