• The S&P 500 officially entered bear territory market on Monday
  • Investors are now keen to buy the dip, but is it the right time?
  • Here’s what the experts are saying

The “Buy-the-Dip” strategy looks to be backfiring right now as stock markets continue to fall.

The S&P 500 extended its decline on Tuesday, and is now at its lowest point in 2022.

The Dow index is officially in a bear market, defined as a 20% drop from the most recent high.

Tech-heavy Nasdaq meanwhile is down 30% this year as growth stocks fight the steepest and fastest Fed rate hike in history.

But trading volumes on the S&P 500 show that retail investors seem to be buying more when the index is falling than when it’s rising.

Most investors seem to have been accustomed to the idea that whenever the stock market went down temporarily, it was bound to quickly snap back higher than it was – a scenario which has repeated itself over and over in the past decade.

Experts however advised that investors should show restraint when buying the dip, as data suggests that 2022 is the worst year for buying the stock market dip since 1929 (the year of the worst market crash in US history).

As a side note, these are the biggest Wall Street crashes of all time:

1929: The Great Depression where the Dow lost 89%
1973: The oil crisis (market lost 48%)
2000: The Dot Com bubble (Nasdaq lost 77%)
2000: The subprime mortgage crisis (S&P 500 lost 57%)
2020: The Covid-19 crash (market lost 34%)

The problems in 2022 are different from all those other years, because this year the market is fighting a tsunami of adverse events, all at the same time.

We have worldwide runaway inflation, central banks hiking rates, a European war, an energy crisis, and lingering supply chain issues.

We also have a steep slowdown in China, the one big engine that has been the driving force of global growth over the past decade.

In addition, investors are now beginning to realise that trades that worked well during the pandemic are no longer working.

You don’t need to look further than Cathy Wood’s ARK Innovation ETF (NYSEARCA: ARKK) to find evidence of that.

The ARKK fund, which invests heavily in Covid plays like Zoom, streaming content Roku and vaccine stocks Moderna, has seen its price plummet by more than 60% this year.

But ARKK fund manager Cathy Wood has been doubling down on her pandemic darlings over the past few weeks, leading investors to ask if it’s now time to buy the dip.

So here’s what the experts are saying on that very subject.

Goldman downgrades S&P 500 outlook

Goldman Sachs  has issued a new end-of-year target for the S&P 500 of 3,600, down from its previous forecast of 4,300.

The S&P 500 closed at 3,647 overnight.

The bank warned that the Fed’s fast pace of rate hikes will likely lead to further stock selloffs before the end of 2022.

“The expected path of interest rates is now higher than we previously assumed, which tilts the distribution of equity market outcomes below our prior forecast,” said Goldman’s chief US equity strategist, David Kostin.

“The S&P 500 index actually reached our previous year-end target of 4,300 in mid-August, but the rate complex has subsequently shifted dramatically,” he said in the note.

Goldman also warned the S&P 500 could fall as low as 3,400 if earnings decline and the Fed’s attempts to curb red-hot inflation lead to a hard landing and a recession.

“The outlook is unusually murky. The forward paths of inflation, economic growth, interest rates, earnings, and valuations are all in flux more than usual, with a wider distribution of potential outcomes,” said Goldman.

Bell Curve says don’t buy the dip until…

Bell Curve Trading’s Bill Strazzullo says the the key trend investors need to focus on is the rally off the March 2020 lows.

Using this as a base, the S&P 500 has more downside to come, and at the minimum will test 3,500 –  which was the March 2020 mid-range.

“I think we might get a short-term bump anywhere from 3,600 to 3,650, but I think the bigger picture is that we will test 3,500.

“And that is just a place where I would cover shorts and bearish positions,” Strazzullo told CNBC.

“In terms of being a long-term accumulator, we’re telling clients what we we want is to begin to buy somewhere even deeper around 3,300.”

RBC Markets signals more falls

A note out of RBC Capital Markets said the S&P 500 is approaching an important level to watch beyond its 2022 low amid recession fears and soured sentiment in the US stock market.

“We think stocks are on the cusp of an important test,” said Lori Calvasina, head of US equity strategy at RBC.

“While the June lows now seem unlikely to hold, if the S&P 500 experiences its typical recession drawdown of 27%, the index will fall to 3,501.”

Calvasina says the 3,500 level is important as it’s “the point at which a median recession would be priced in,” perhaps drawing in some investors to buy the dip.

She believes the S&P 500 index’s forward price-to-earnings ratio would fall below average if it hits 3,501.

“That may open the door for bargain hunters, though fundamental catalysts for a move higher – other than the midterms – admittedly are hard to identify,” she said.

Satori Fund sees opportunities

Satori Fund’s Dan Niles is more bearish, saying that the S&P 500 could touch 3,000.

At the moment, Niles has 50% of his portfolio in cash.

“We came into this year saying we thought cash would be one of the best investments for retail investors,” he said.

While that has been a good strategy, Niles said that his cash holding will become less over time.

He said when the S&P 500 does touch 3,000 he will be ready to buy stocks where the fundamentals are still strong.

“We’ll be nibbling on the energy sector again, and will invest into the defensive stocks like Walmart.”

Walmart was up 18% in 2008 when the S&P 500 was down by 38%.

“Healthcare is a good defensive area we also want to be aggressive in, and we also like the online sports betting space,” Niles said.


Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.