Some stock market oversold signals are flashing, encouraging the buy-the-dip crowd, but not every indicator is saying it’s time to buy, and that may give investors enough reason for caution.
After notching three consecutive years of double-digit gains, worries that prices had moved too far too fast, increasing the risk of a reckoning for the Dow Jones, S&P 500, and technology-heavy Nasdaq, look prescient so far in 2026.
Technology stocks were the first to crack, losing ground since September. Other sectors, including energy, healthcare, and industrials initially picked up the slack, propping up the major indexes. However, the Iran War has sent Treasury yields surging, derailing those baskets and causing the Dow Jones, S&P 500, and Nasdaq to break through closely watched 200-dma trend lines. The small cap Russell 2000 is similarly threatening to join them.
“Since 1950, when the S&P 500 closes above this trendline the annualized return is 21.1%. When it closes beneath? -22.2%. Proving once again that bad things tend to happen beneath this trendline,” noted Carson Group’s popular market strategist Ryan Detrick on X.
That’s a troubling development, but some technical sentiment measures, including the relative strength index, may suggest that stocks are due for a bounce – at least short term. Whether such a bounce would be long lasting like last year’s April recovery from near-bear-market lows remains to be seen. The situation isn’t nearly as clear now as last year, though.
Buy the dip or sell the rip?
Typically, investors view selloffs as buy opportunities, allowing those who missed the move to pick up shares, helping stocks bounce when they test critical support lines like the 200-dma.
However, buy-the-dip bounces like that typically work best early on in a bull market move, not after big and longer term moves that have reduced available cash on the sidelines.
Arguably, most of Main Street has already used prior retreats to move money into the markets, including into assets like gold and silver.
The temptation to buy into a sell-off is also reduced by the fact that bonds offer better returns than a few months ago. For instance, the 10-year Treasury Note yield is nearly 4.4% and the 2-year Treasury bill yield is 3.91%, up from about 3.4% in late February.
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That doesn’t mean stocks won’t bounce, but it may mean that the Dow, S&P 500, and Nasdaq are in what I like to call “prove it” territory, rather than this being an all-in moment like last April.
Many investors bought assets at higher prices, including stocks, gold and silver, and they more likely to press the sell button on rallies, creating a weight of overhead supply that could make a buy-dip rally short-lived as would be sellers “sell-the-rip.”
Given that backdrop, there’s little incentive to risk, as gray-haired traders on Wall Street like to say, catching a falling knife. At least, not until the indexes recapture and retest the 200-dma successfully.
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After all, mid-term election years are prone to pain. On average, the S&P 500 experiences an average drop of 17.5% at some point before the election during mid-term years, a much larger drawdown than the other three years of the Presidential cycle.
A trust, but verify market
I’ve seen plenty of drops like this over my 30 years and there are always good arguments for more losses or for stocks to bottom. Everyone has an opinion, but for my money I like to consider data rather than opinions.
There are a few specific things I like to see to suggest that the odds favor an oversold market worthy of taking on the risk of buying:
- A put/call ratio above 1.20: Options trading rises with volatility, and when investors rush to buy puts to hedge positions or capitalize on weakness, it can signal we’re nearly ready for a rally.
- A greed/fear ratio at “extreme fear”: Humans are emotional and sentiment drives our desire to buy and sell. When CNN’s Fear & Greed Index flashes extreme fear, it suggests people have already run for the hills, leaving few left to sell.
- AAII’s bull/bear ratio tilts significantly bearish: Another sentiment indicator, I like to see the six-month forward expectation from traders responding to AAII’s survey decisively in the bearish camp.
- A volatility index north of 30: A reading of the VIX above 25 is solid, but 30 is even better (and spikes to 40 or more are even more intriguing). Volatility is a great tool for determining when things become overdone.
- A relative strength index below 25: Again, below 30 is solid, but below 25 is better (and below 20 can suggest a back-up-the-truck moment). When RSI, which measures overbought and oversold by tracking trading over the past 14 sessions, gets that low, it usually means a rally is likely.
So where do we stand currently?
- The CBOE total put/call ratio is 1.01.
- CNN’s Fear/Greed Index is at “extreme fear.”
- AAII’s Sentiment Survey shows 52% of respondents are bearish six months out, putting it “above its historical average of 31.0% for the sixth consecutive week,” according to AAII.
- The volatility Index (VIX) is currently at 26.78, according to MarketWatch.
- The Dow Jones Industrial Average (DIA), S&P 500 (SPY), Nasdaq 100 (QQQ), and Russell 2000 (IWM) RSIs are 25.11, 29.63, 35.2, and 32.97, respectively, using exchange traded funds as proxy.
Overall, there’s mounting evidence we’re “getting there” regarding oversold, and that’s undeniably compelling, particularly given the old Wall Street adage, “buy on the sound of cannons, sell on the sound of trumpets.”
“Now might be a good time to consider putting some cash to work for those willing to take on more risk and inclined to “buy to the sound of cannons,” noted long-time fund manager Dan Niles on X.
Still, not every measure is as stretched as it could get.
As a result, investors may want to take a ‘trust but verify’ approach to buying weakness. Being willing to miss “nailing the bottom” by testing the water slowly may be wisest.
Related: JPMorgan resets S&P 500 price target for rest of 2026
