Fri, February 21, 2025 | 7:50AM ET

Investors continue to "buy the dip" as sentiment shows bearishness while markets touch all-time highs. This is a good sign.

Name: FS Insight
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Tom Lee, CFA ^AC

Head of Research

VIDEO: Investors have been persistently bearish while S&P 500 making all-time highs. This is rare and in the past 40 years, only happened 11 times and forward returns are good

Please click below to view our Macro Minute (duration: 7:09).

Investors continue to buy the dip as sentiment shows bearishness while markets touch all-time highs. This is a good sign.

The S&P 500 is tracking for a flat week (down slightly), as markets pulled back post Walmart’s disappointing EPS guidance (WMT). While stocks fell sharply at the open Thursday and selling was broad-based, dip buyers stepped in and the resulting decline Thursday was modest:

This is a pattern seen in 8 of the last 10 trading days — dip buyers step in on any market weakness. And it has been a pattern for 2025 overall. The S&P 500 has had many chances for a deeper sell-off, but these declines attract dip buyers. In our view, we believe there are 3 reasons this is happening in 2025 (among other reasons):
– first, Investors are “bearish” while S&P 500 is at all-time high
– second, there is $7 trillion of cash on sidelines
– third, this is a further sign of the bull market of 2023-2024 continues
Using AAII Net bulls as a proxy for sentiment (we consider this the best measure of retail sentiment), there are only 11 prior instances the S&P 500 is within 1% of a 52-week high while net bulls is -15 or worse:
– in past 40 years, only 11 instances, or 0.5% of readings
– median 12M forward gain +15.7%
– win-ratio 83%
Since 2009, there are 6 such readings, week of:
– 11/9/09 +11%, next 12 mos
– 10/18/12 +20%
– 4/11/13 +14%
– 3/10/17 +17%
– 8/10/20 +32%
– 12/7/21 -16%
So in the last 15 years, this has been a great tactical signal and as you can see above, with really good returns. After all, if investors are skeptical of markets at all-time highs, we believe the odds of an actual high in play is low. That is, this is a contrarian bullish signal.
The caveat, however, is that 2 of the 11 readings were in fact, signal of a near-term top
– 5/3/07
– 12/21/21
– is this the case in 2025? We doubt it given the chorus of bearish takes. And the fact investors are so quick to declare this is the top.
As for the rising money market balances, $7 trillion is staggering. And it is up $2T since 2022.
– in just the past 3 weeks
– retail investors added $40 billion to money market balances
– institutions added $1 billion
– so retail is the cohort turning more cautious
– again, bullish in our view

The overall macro data this week has been favorable:
– 2/17 Mon: President’s Day Holiday
– 2/18 Tue 8:30 AM ET: Feb Empire Manufacturing Survey    5.7 vs 0e
– 2/18 Tue 10:00 AM ET: Feb NAHB Housing Market Index    46 vs 47e
– 2/18 Tue 4:00 PM ET: Dec Net TIC Flows    $87.1b
– 2/19 Wed: Market Update Webinar – Return of Super Grannies
– 2/19 Wed 9:00 AM ET: Feb M Manheim Used Vehicle Index    203.3
– 2/19 Wed 2:00 PM ET: Jan FOMC Meeting Minutes
– 2/20 Thu 8:30 AM ET: Feb Philly Fed Business Outlook    18 vs 15e
– 2/21 Fri 9:45 AM ET: Feb P S&P Global Manufacturing PMI    51.4e
– 2/21 Fri 9:45 AM ET: Feb P S&P Global Services PMI    53.0e
– 2/21 Fri 10:00 AM ET: Feb F Umich 1Y Inflation Expectation    3.3%e
– 2/21 Fri 10:00 AM ET: Jan Existing Home Sales    4.13me
Of the potential “landmine” on Friday, we are keeping an eye on the U Mich inflation expectations. Two weeks ago, this survey triggered a sell-off in stocks as the 1-yr inflation expectations jumped to +4.3%. But as we noted in subsequent notes, this reflects the political dynamics as Democratic respondents saw a massive surge in inflation expectations. In fact, 7% of Dem respondents now expect inflation of 25% in the next 12 months. Wow.

BOTTOM LINE: Investors are “buying the dip” as 2025 is tracking better than expected

But the bigger message is that investors are buying the dip. We believe this should be the key takeaway this week. And secondarily, that the market participation is broadening beyond MAG7.

There are six reasons that show 2025 tracking better than our base case:

Barometer “first 5 days” positive = 82% win-ratio
Sentiment capitulation on Dec to Jan chop = good
Inflation tracking “softer” than consensus view
Fears of “day 1 tariffs” overblown = USD weaker
Cyclicals leading YTD = risk-on signal
January barometer “positive” = 89% win-ratio

January 2025 closed +2.7%. This is the January barometer “as January goes, so goes the year”:
– The January barometer is as follows:
– If January positive:
– Median FY +19%, 89% win-ratio
– If January negative:
– Median FY +0%, 50% win-ratio
The top sector ideas remain:
Bitcoin
Small-caps
Financials
Industrials
Technology

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Key incoming data February:

~~2/3 9:45 AM ET: Jan F S&P Global Manufacturing PMI~~ Tame
~~2/3 10:00 AM ET: Jan ISM Manufacturing PMI~~ Tame
~~2/4 10:00 AM ET: Dec JOLTS Job Openings~~ Tame
~~2/4 10:00 AM ET: Dec F Durable Goods Orders~~ Tame
~~2/5 8:30 AM ET: Dec Trade Balance~~ Tame
~~2/5 9:45 AM ET: Jan F S&P Global Services PMI~~ Tame
~~2/5 10:00 AM ET: Jan ISM Services PMI~~ Tame
~~2/6 8:30 AM ET: 4Q P Non-Farm Productivity~~ Tame
~~2/6 8:30 AM ET: 4Q P Unit Labor Costs~~ Tame
~~2/7 8:30 AM ET: Jan Non-Farm Payrolls~~ Tame
~~2/7 9:00 AM ET: Dec F Manheim Used Vehicle index~~ Tame
~~2/7 10:00 AM ET: Feb P U. Mich. Sentiment and Inflation Expectation~~ Hot
~~2/10 11:00 AM ET: Jan NY Fed 1yr Inf Exp~~ Tame
~~2/11 6:00 AM ET: Jan Small Business Optimism Survey~~ Tame
~~2/12 8:30 AM ET: Jan CPI~~ Hot
~~2/13 8:30 AM ET: Jan PPI~~ Hot
~~2/14 8:30 AM ET: Jan Retail Sales Data~~ Tame
~~2/18 8:30 AM ET: Feb Empire Manufacturing Survey~~ Tame
~~2/18 10:00 AM ET: Feb NAHB Housing Market Index~~ Tame
~~2/18 4:00 PM ET: Dec Net TIC Flows~~ Tame
~~2/19 9:00 AM ET: Jan M Manheim Used Vehicle index~~ Tame
~~2/19 2:00 PM ET: Jan FOMC Meeting Minutes~~ Dovish
~~2/20 8:30 AM ET: Feb Philly Fed Business Outlook~~ Tame
2/21 9:45 AM ET: Feb P S&P Global Manufacturing PMI
2/21 9:45 AM ET: Feb P S&P Global Services PMI
2/21 10:00 AM ET: Feb F U. Mich. Sentiment and Inflation Expectation
2/21 10:00 AM ET: Jan Existing Home Sales
2/24 8:30 AM ET: Jan Chicago Fed Nat Activity Index
2/24 10:30 AM ET: Feb Dallas Fed Manuf. Activity Survey
2/25 9:00 AM ET: Dec S&P CoreLogic CS home price
2/25 10:00 AM ET: Feb Conference Board Consumer Confidence
2/26 10:00 AM ET: Jan New Home Sales
2/27 8:30 AM ET: 4Q S GDP
2/27 10:00 AM ET: Jan P Durable Goods Orders
2/28 8:30 AM ET: Jan PCE Deflator

Economic Data Performance Tracker 2025:

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023:

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