The recent multi-week downturn in the stock market, initiated at the beginning of the month, is likely drawing to a close, according to Tom Lee of Fundstrat.
In a recent client advisory, Lee, a steadfast optimist in stock market growth, analyzed the nearly 5% drop in stock values over the last three weeks. He characterized this movement as a standard de-leveraging phase, suggesting an imminent shift towards market recovery.
Lee observes that despite a robust performance in the first quarter of 2024, the subsequent consolidation and slight decline in stock prices align with typical market behaviors and do not foreshadow a major downturn. "Given the market's strong start this year, a period of consolidation isn't unexpected," Lee explained. He remains confident that the current market conditions are set to reverse without spiraling into a more significant decline.
The recent drop has been primarily fueled by a dual set of concerns: disappointing updates on inflation and heightened geopolitical tensions in the Middle East. However, Lee is optimistic that these pressures will soon alleviate, allowing the market to regain its upward momentum and potentially reach new highs before year's end.
Lee cites five key indicators supporting his prediction that the market downturn is nearing its end:
Stable VIX Levels: The Volatility Index (VIX), a popular measure of market fear, has stayed relatively low during this period of fluctuation. Despite a notable 7% increase on Friday, the VIX has not breached the critical 20-point threshold, which typically signals a shift from risk-on to risk-off sentiments. Lee points out that a VIX under 18 could indicate a bullish reversal in the stock market.
VIX Term Inversion: Earlier this week, the VIX term structure briefly inverted, suggesting increased short-term volatility, before promptly reverting. This rapid uninversion hints at diminishing market expectations for an imminent high-volatility event. Such dynamics in the VIX were last seen in March 2023, just before a significant market rally.
Rapid Pace of Losses: Interestingly, Lee suggests that a recent acceleration in market losses could indicate that the phase of portfolio de-leveraging is almost complete. He notes that when the S&P 500 experiences a sharp rate of loss, as seen in its recent 3.6% drop over five days, such moments historically preceded market recoveries.
High Put-to-Call Ratio: The elevated put-to-call ratio, currently at 1.13, reflects a predominance of bearish sentiment in options trading. Historical data suggests that similar levels have frequently coincided with market lows, offering potentially lucrative entry points for traders.
Technical Market Low: Fundstrat’s technical strategist, Mark Newton, predicts a market bottom could emerge by early next week. Newton’s analysis is buoyed by the resilience of technology stocks which have maintained their uptrend relative to the broader S&P 500 index. Furthermore, the lack of strength in traditionally defensive sectors and sustained market breadth reinforce his optimistic outlook.
In summary, while recent weeks have seen heightened volatility and bearish trends, the analysis provided by Lee and his team at Fundstrat suggests these may be harbingers of a forthcoming positive correction rather than the onset of a deeper slump. This insight provides a silver lining for wealth advisors and RIAs looking to navigate the current market dynamics efficiently.
