The market is down -20% and entering a bear market? Buy the dip. However, buying the dip is not always a winning strategy because only hindsight can identify the bottom. Instead, people buying the dip often see the stock dip further, sometimes significantly further, and not reach its previous levels for years, if ever.
This leads us to today’s environment. S&P 500 (SPX) is down over -21% YTD and still trending downward, meaning we are officially in a bear market. It’s time to buy that 21% dip, right? Perhaps not if one values technical analysis.
Suttmeier believes the index needs to break a significant resistance level in the 3800s, with the BofA analyst explaining:
On the downside, Suttmeier sees 3,500, a 50% retracement of the March 2020-January 2022 rally, as a critical support level. If it crosses that threshold, he believes the next stop is 3,200, representing a 62% retracement of the rally. Below 3,200, and we start sinking into the COVID-19 lows.
The market had regained most of what it lost when the Federal Reserve announced a 0.75% interest rate hike, but we do not yet know if that raise will do enough to slow down inflation. There’s a strong possibility that it will not, and additional raises may be necessary.
If another hefty raise is needed, it will be a near certainty that a recession is coming. This would likely cause the markets to fall and begin testing the support levels Suttmeier outlined. All eyes will continue to be on the Consumer Price Index (CPI) reports to see if inflation is slowing down. If it’s not, more pain is coming.
The S&P 500 last traded at $3,785.91, up +0.56% on the day. YTD, SPX is down -21.07%.
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Disclaimer: Wealthy VC does not hold a position in any of the stocks mentioned in this article.