Wall Street’s “buy the dip” mentality is sabotaging the stock market’s upside potential. That’s because this mindset keeps investor sentiment from ever becoming bearish enough to support more than a relatively anemic rally.
Investors’ buy-the-dip tendencies are illustrated in the chart below, which plots the average recommended equity exposure, using the Dow Jones Industrial Average DJIA, -0.47% as a benchmark, among a subset of short-term stock market timers tracked by my auditing firm. This average is what’s measured by the Hulbert Stock Newsletter Sentiment Index (HSNSI).
Notice the increasingly higher lows to which the HSNSI has dipped during periods of market weakness over the past two years. March 2020 was the last time the HSNSI dropped solidly into the zone