May 30, 2024

5 reasons why the stock market’s multi-week sell-off will end soon, according to a Wall Street bull

A trader with his hands together, looking worried.

Getty Images/Bryan R. Smith

  • The ongoing stock market sell-off is close to ending, according to Fundstrat’s Tom Lee.

  • Lee offered five reasons why he expects the multi-week stock decline will soon reverse.

  • “Equities had a strong first quarter 2024, so the fact that stocks are consolidating and even drifting lower is not entirely a surprise,” Lee said.

The multi-week stock market sell-off that began at the start of the month is nearing its end, according to Fundstrat’s Tom Lee.

The long-time stock bull told clients in a note on Friday that the near 5% decline in stocks over the past three weeks was a simple de-leveraging event that was likely nearing its end, setting the market up for a rebound in the short-term.

“Equities had a strong first quarter 2024, so the fact that stocks are consolidating and even drifting lower is not entirely a surprise. The difference in our take, at this time, is that we do not see a larger decline ahead,” Lee said.

The decline in stocks has been driven by a one-two risk-off punch related to disappointment around recent inflation trends and growing geopolitical risk in the Middle East.

But Lee ultimately expects these risks to disperse, paving the way for stocks to resume their uptrend and hit new record highs before the end of the year.

These are the 5 reasons Lee believes the current stock market decline is nearing its end.

1. A subdued VIX

Lee took solace in the fact that the VIX, which measures fear on Wall Street, has been rather subdued amid the recent stock market volatility.

The VIX has remained below the all-important risk-on/risk-off level of 20 throughout the decline, even when considering Friday’s 7% surge in the volatility index.

According to Lee, if the VIX falls below 18, it would serve as a bullish sign for renewed upside in stock prices.

2. VIX term inversion

The VIX term structure, or the difference between the 4-month and 1-month VIX futures, inverted earlier this week, and then quickly uninverted.

The uninversion of the VIX means that “markets see lower probabilities of a major high volatility event in the near term,” Lee said.

The last time the VIX experienced an inversion and then subsequent uninversion was in March 2023, which marked a local bottom in the stock market and was followed by a massive year-long rally to the upside.

3. Accelerating losses

It might sound counter-intuitive, but an acceleration in stock market losses over the past week could be a sign that investors’ process of de-leveraging their portfolio is nearing its end.

Lee highlighted that the S&P 500 saw a five-day negative rate of change of 3.6%. The S&P 500 has experienced this pace of losses seven times since October 2022, and in five of those seven times, it served as an immediate tradeable low.

4. The put-to-call ratio is elevated

The put-to-call ratio measures options buying activity of bearish puts and bullish calls, and its most recent reading shows an elevated amount of bearish activity, with investors overwhelmingly favoring buying puts instead of calls.

The most recent reading of 1.13 in the put-to-call indicator represents an elevated level that in the past has served as a tradable low.

Since October 2022, the put-to-call ratio hit 1.13 seven times, and six out of those seven times, it represented a bottom in the stock market.

5. A technical low

Lee pointed to recent commentary from Fundstrat technical strategist Mark Newton, who argues that a bottom in the stock market could appear by early next week.

Newton’s bullish reasoning includes the fact that weakness in technology stocks has not violated uptrends relative to the S&P 500, strength in defensive sectors like consumer staples and REITs has been lacking, and overall market breadth has held up well.

Read the original article on Business Insider

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