- The ongoing stock market selloff is nearing an end, according to Fundstrat’s Tom Lee.
- Lee gave five reasons why he expects the weeks-long decline in stock prices to reverse soon.
- “The stock price has been strong in the first quarter of 2024, so the fact that the stock price is performing well and even trending down is not at all surprising,” Lee said.
Fundstrat’s Tom Lee says the weeks-long stock market selloff that began at the beginning of the month is nearing an end.
The longtime stock bull told clients in a note Friday that the nearly 5% drop in stock prices over the past three weeks was a simple deleveraging event, likely nearing its end and pointing to a near-term market rebound. He said he is preparing. -semester.
“The stock market was strong in the first quarter of 2024, so the fact that stock prices are holding strong and even trending down is not at all surprising. “It means we don’t expect a bigger decline,” Lee said. .
The decline in stocks has been driven by a one-two risk-off punch related to disappointment with recent inflation trends and rising geopolitical risks in the Middle East.
But Lee expects those risks to eventually dissipate, paving the way for stocks to resume their upward trend and reach new highs by the end of the year.
These are five reasons why Lee thinks the current stock market decline is nearing an end.
1. Calm VIX
Lee took solace in the fact that the VIX index, which measures Wall Street fear, has been largely subdued amid recent stock market volatility.
Even taking into account Friday’s 7% rise in the volatility index, the VIX remained below the all-important risk-on/risk-off level of 20 throughout the decline.
According to Lee, if the VIX falls below 18, it would be a bullish sign for stocks to rise again.
2. Inversion of VIX term
The term structure of the VIX, or the difference between 4-month and 1-month VIX futures, reversed earlier this week and shortly thereafter.
The fact that the VIX hasn’t reversed means that “the market sees a low probability of a major event with high volatility in the short term,” Lee said.
The last time the VIX reversed and then reversed was in March 2023, marking a local bottom in the stock market, followed by a massive year-long bull market.
3. Acceleration of losses
It may sound counterintuitive, but the acceleration in stock market losses over the past week may indicate that investors are nearing the end of the process of deleveraging their portfolios.
Mr. Lee highlighted that the S&P 500’s five-day gain and fall rate was -3.6%. The S&P 500 index has experienced seven declines at this pace since October 2022, five of which resulted in instantly tradeable lows.
4. Put-to-call ratio increases
The put-to-call ratio measures bearish put and bullish call option buying activity, and its latest reading shows that the amount of bearish activity is increasing, with investors increasing the number of calls. I am overwhelmingly in favor of buying puts instead.
The latest value of the put-to-call indicator, 1.13, indicates an increase in levels that have served as tradable lows in the past.
Since October 2022, the put-call ratio has reached 1.13 seven times, six of which were stock market bottoms.
5. Technical law
Lee pointed to recent comments from Fundstrat technical strategist Mark Newton, who argued that the stock market bottom could appear by early next week.
Newton’s bullish arguments include that weakness in tech stocks is consistent with the uptrend relative to the S&P 500, lacks strength in defensive sectors such as consumer staples and REITs, and that the overall market is not sufficiently broad. It includes the fact that it is preserved.
