Why the Stock Market Likely Hasn’t Bottomed and You Shouldn’t ‘Buy the Dip’ Yet
The investing community is fairly predictable when it comes to doling out investment advice during market downturns.
Overwhelmingly, the recommendation given the most is to “buy the dip.” Your favorite stock is down 10%? Buy the Dip. But should you right now?
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.
Despite the 2.5% rise in the S&P 500 to ~3770, Bank of America (NYSE: BAC) Analyst Stephen Suttmeier thinks it has further to go before we can say we are back on the uptrend.
Suttmeier believes the index needs to break a significant resistance level in the 3800s, with the BofA analyst explaining:
“This aligns with the broken late May low at 3810 and the key retracement levels at 3815 (38.2% of the March 2020 to January 2022 rally) and 3824 (61.8% of the September 2020 to January 2022 rally).”
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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