The stock market has exited the “sell the rip” regime in favor of “buying the dip,” according to Fundstrat’s Tom Lee.
That sets the S&P 500 up for a potential breakout above its 4,200 resistance level as investors worry about the debt ceiling.
“This is creating a positive feedback loop, in the sense that capital invested on dips will recover losses quickly,” Lee said.
Lee and his team of analysts identified the “sell the rip” regime as a period when stocks fall 2% in a week and fall further over the next 20 days. On the flip side, a “buy the dip” regime is identified as when stocks fall 2% in a week but recover the entire loss within 20 days.
Since 1928, it has paid to be invested in stocks during a “buy the dip” regime, which has occurred 60 times to deliver an average annualized gain of 28%. That pales in comparison to a “sell the rip” regime, which since 1928 occurred 30 times with an average annualized loss of 25%.
Luckily for investors, “buy the dip” returned to the stock market on March 23, according to Fundstrat, and that sets stocks up well for further gains.
“This is creating a positive feedback loop, in the sense that capital invested on dips will recover losses quickly. This was hardly the case in 2022, where for a 9-month period, every single dip of 2% was followed by an additional bout of selling,” Lee explained.
The return of “buy the dip” adds to Lee’s confidence that the S&P 500 will rise above its closely watched resistance level of 4,200.
“Still expecting an upside resolution towards S&P 500 4,200-plus,” Lee said, adding that the risk of the debt ceiling is binary in nature. “A binary event is weighing on market risk-appetite at a time when there is little incoming macro data. Thus, markets are stuck in the near-term. That said, we see the rational for being overweight [stocks].”
Lee highlighted that the mega-cap tech stocks have positive leverage to the growing artificial intelligence opportunity, that regional banks are poised for a tactical rally, and that the S&P 500 sports a reasonable valuation when you exclude mega-cap tech stocks.
“We simply do not see equities as that expensive, especially with Fed on a ‘pause.’ Ex-FAANG, the forward P/E is 14.8x and the most expensive stocks are staples (~20x) and utilities (17x),” Lee said.
Lee reiterated his S&P 500 year-end price target of 4,750, which represents potential upside of about 14% from current levels.
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