The buy-the-dip crowd is circling the markets like a hungry shark does a wounded whale after a brutal January.

"The equity market sell-off is overdone in our view, and we reiterate our call to buy the dip, particularly in cyclicals and small caps," said JPMorgan strategist Marko Kolanovic in a new research note. 

That is easier said than done for most investors following a tough start to the year for markets.

The S&P 500 index sold off to the tune of 5.3% in January, marking its worst monthly performance since March 2020 as traders fretted about the pace of rate hikes from the Federal Reserve. As for the Nasdaq Composite, it tanked 9% in January — with a lot more ugliness underneath the surface of the tech heavy index. 

About 46% of the Nasdaq’s members are down at least 50% from their 52-week highs, according to Liz Ann Sonders, Charles Schwab chief investment strategist. Roughly 76% of the Nasdaq’s members are down at least 20% from their 52-week highs.

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AMD (AMD) shares plunged 21% in January, while Netflix (NFLX) fell 31%. Cathie Wood's Ark Innovation ETF — which includes high beta Tesla and Zoom as top holdings — was pounded by 21%.

"We had this shakeout in January, and it brought us close to reality," said SoFi head of investment strategy Liz Young on Yahoo Finance Live.

JPMorgan's Kolanavic contends markets are now pricing in too much fear.

"Stocks are in bear market territory and erased their post-pandemic re-rating, small cap valuations are at 20Y lows, and investor sentiment is bearish. Many market metrics such as recent performance of high vs. low beta stocks and valuations of small caps are already fully pricing in a recession — something we do not see materializing," added the strategist. 

Data from LPL Financial suggests the markets could bounce back a bit in February. 

LPL found going back to 2003 that when the S&P 500 was lower in January, the final 11 months of the year are up 62% of the time versus 86% if January is higher. The average return over those 11 months tallied 13.1%. 

Story continues

"There are two parts to the 'buy-the-dip' phrase: Buy the dips and sell the rips. We have kind of forgotten the second part of that. I think this is an environment you are going to get the opportunity to do both," said Interactive Brokers chief strategist Steve Sosnick on Yahoo Finance Live.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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