Over the past two years, Rolls-Royce (LSE: RR) shares have displayed the strongest momentum I can bear in mind for a longtime FTSE 100 firm. They’re up greater than 300% in simply 24 months!

Nevertheless, such momentum generally is a double-edged sword. When a share worth is persistently rising, this may entice extra buyers and drive it ever larger. That’s nice for current shareholders.

However this may rapidly result in overvaluation, the place the share worth turns into disconnected from the underlying fundamentals and prospects of the agency. And this may trigger a sudden correction (a fall of greater than 10%).

After just lately reaching 429p, the Rolls-Royce share worth has now dropped beneath 400p. Ought to I seize upon this dip to purchase extra shares? Let’s have a look.

Why is the inventory falling?

So far as I can inform, there was no information from the corporate to warrant the latest sell-off. And analysts stay overwhelmingly bullish. Of the 14 providing one-year worth forecasts, the consensus is 447p, or 12% above the present 399p.

Just one analyst out of 17 presently has a promote ranking on the inventory.

In fact, brokers are sometimes hyper-reactive to what’s occurring with the share worth. If it’s going up, they’ll begin elevating their targets, and vice versa. So some could now change their minds and switch bearish.

They remind me a little bit little bit of these bookies on the race monitor who change the percentages as kind of cash is positioned on explicit horses, canine, or no matter. It will probably all be a bit speculative.

Extra doubtless is that the shares are shedding altitude attributable to stories that rates of interest could also be staying larger for longer than anticipated. In March, US client costs rose 3.5% from a 12 months in the past, greater than anticipated. So there’s in all probability that.

Defence shares are falling

One other possible issue right here is that it’s been a foul few days for European defence and aerospace shares basically.

Shares of BAE Methods, which have additionally been on fireplace over the previous two years, have pulled again 4.8% since 8 April. In the meantime, Germany’s largest arms agency, Rheinmetall, has seen its share worth fall almost 6%.

Rolls-Royce’s defence unit accounted for nearly 1 / 4 of group income final 12 months. So there’s in all probability this sector-wide sell-off contributing to the autumn as properly.

Really, I discover the timing of this drop in defence shares considerably stunning. Sky Information right now (11 April) reported that an Iran assault on Israel could possibly be “imminent“.

Given such disturbing geopolitical developments, I can solely see defence shares heading larger.

Ought to I purchase this dip?

There’s extra to Rolls-Royce than defence, in fact. Its civil aerospace division has the wind in its sails, with giant engine flying hours this 12 months projected to achieve (or maybe exceed) pre-Covid 2019 ranges.

Is that this rosy outlook already priced into the inventory, although? In all probability, for my part. It’s buying and selling on a ahead price-to-earnings (P/S) ratio of 27.6. That doesn’t appear to depart a lot of a margin of security.

Long run, I’m nonetheless bullish on Rolls-Royce inventory. I’d similar to to see it come down a bit extra, which is totally doable given how fickle market sentiment could be.