Sell the rally or buy the dip?

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1. Sell the rally or buy the dip?

The market tried to bounce this week, and we are beginning to see early signs of a bottom forming.

However, on Friday, the impact of tariffs and a slighter, hotter-than-expected inflation print sent markets tumbling.

The good news is that the market remains on a buy signal, with an improvement in both money flows and relative strength. As shown, the MACD (in the middle) and relative strength (below) are currently at levels not seen since the October 2022 lows, and are providing the support needed for a rally.

2. Investor sentiment.

Sentiment tells us what investors are “feeling.” As is always the case, investors tend to provide the best contrarian investment signals at extremes of emotions.

Emotions drive investment mistakes, one key reason for monitoring investor sentiment.

The chart below is a version of an investor sentiment composite index (retail and professional). The green bars represent periods where combined investor sentiment is extremely bearish, like now.

Unsurprisingly, when investors are the most bearish, markets have generally been at or close to their correction lows.

Source: The Bull Bear report.

3. Value stocks are having their moment in the sun.

The S&P 500 Value Index — home to shares of banks, consumer staples, health care and other companies that appear cheap compared to fundamentals — is up 0.4% this year, versus a 6.5% decline for its flashier, growth-focused counterpart.

If that holds through the end of March, it would be the value gauge’s best quarterly run against its rival since the market meltdown of 2022.

Worries over historically elevated tech stock valuations, combined with a tariff-induced bout of risk avoidance, have driven the recent rotation from growth into value.

While such moves have been short-lived in the past, investors say this time around, profit expectations are so modest that value-oriented companies have a good shot at beating them when earnings season kicks off next month. “The bar has been set pretty low for value stocks compared to the uncertainty surrounding growth names and their ability to deliver on earnings estimates,” said Dan Morgan, senior portfolio manager at Synovus Trust. “If value can at least match or slightly beat expectations, the runway is clear for them.”

4. The “Magnificent 7” fall as worries over demand and growth linger.

Major US technology and internet stocks were falling sharply last week, with Nvidia set to extend its longest losing streak in over a month as worries linger over demand for AI and the impact of President Donald Trump’s trade war on growth.

The S&P 500 Growth Index trades at a forward price-to-earnings multiple of about 25 times, compared to 18 times for the value index. The so-called Magnificent Seven group of tech-focused stocks, which includes massive companies such as Nvidia Corp. and Apple Inc., trade at an average of 27 times earnings.

Of course, the valuation comparison can work both ways, with the sharp selloff in growth stocks making them far less expensive than in the past. The average valuation for a stock in the S&P 500 Growth Index has fallen by 32% since mid-July, according to data compiled by Bloomberg. For the value index, it has risen by about 9% over the same time.

That could make growth stocks an attractive proposition if tariff worries dissipate and risk appetite returns. Some market participants are already considering buying the dip. “Our bias is to be long riskier factors” over the coming months, said Dennis DeBusschere of 22V Research. “Recession risk is declining as tariff details come out.”

Year-to-date, the Mag7 is down 15%.

5. US consumers are getting squeezed.

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