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Five reasons why the weeks-long stock market sell-off will end soon, according to a Wall Street bull

Vaseline 2 months ago

A trader with his hands together, looking worried.

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  • The ongoing stock market sell-off is nearing an end, according to Fundstrat’s Tom Lee.

  • Lee gave five reasons why he expects the multi-week stock slide to reverse quickly.

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

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

The long-time 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 and was likely nearing its end, which would help the market recover in the near term . -term.

“Equities had a strong first quarter of 2024, so the fact that stocks are consolidating and even declining is not entirely a surprise. The difference in our view at this point is that we don’t see a bigger decline ahead,” Lee said. .

The decline in stock prices has been driven by a one-two punch of risk related to disappointment with recent inflation trends and rising geopolitical risk in the Middle East.

But Lee expects these risks to eventually spread, paving the way for stocks to resume their upward trend and reach new all-time highs before the end of the year.

Here are the five reasons why Lee believes the current stock market decline is nearing an end.

1. An understated VIX

Lee took comfort in the fact that the VIX, which measures fear on Wall Street, has remained fairly subdued amid recent stock market volatility.

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

According to Lee, a drop in the VIX below 18 would be a bullish sign of renewed upside potential in stock prices.

2. VIX term inversion

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

The VIX’s failure to reverse means that “markets see a lower probability of a major high-volatility event in the near term,” Lee said.

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

3. Accelerated losses

It may sound counterintuitive, but an acceleration of equity market losses over the past week could be a sign that investors’ process of deleveraging their portfolios is nearing an end.

Lee highlighted that the S&P 500 had 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 acted as an immediate trading low.

4. The put-to-call ratio has increased

The put-to-call ratio measures option buying activity, consisting of bearish puts and bullish calls, and the most recent reading shows an increased amount of bearish activity, with investors overwhelmingly favoring buying puts over calls .

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

Since October 2022, the put-to-call ratio has reached 1.13 seven times, and six of those seven times it has represented stock market lows.

5. A technical low point

Lee was referring to recent commentary from Fundstrat technical strategist Mark Newton, who said a bottom could appear in the stock market early next week.

Newton’s bullish reasoning includes the fact that weakness in tech stocks hasn’t broken the uptrends versus the S&P 500, that strength has been lacking in defensive sectors like consumer staples and REITs, and that market breadth has generally held up well held.

Read the original article on Business Insider