2 rare signs of market fear have aligned to create an extremely bullish situation for stocks, Fundstrat's Tom Lee says
- Fundstrat's Tom Lee says two rare market signals have aligned to create a bullish setup for stocks.
- The market's fear index spiked by 40% in two days, while the NYSE Tick Index plunged to a low.
- Historical data shows that the S&P 500 tends to surge for months after a spike in the VIX, Lee said.
The recent movements of two market fear signals are setting the stock market up for massive gains, Fundstrat's Tom Lee said.
In a Wednesday-morning note, the head of research detailed two four-standard deviations events on Tuesday that could be bullish signs for stocks.
The first was that the Cboe Volatility Index - or VIX, also known as the stock market's fear index - spiked by 40% in two days, on Monday and Tuesday. Lee said this had happened only 20 times since 1990.
Additionally, the NYSE Tick Index, a measure of stocks moving up versus down on a second-by-second basis, plunged to a record low of negative 2,069 on Tuesday as stocks sold off at the open. It has plunged below negative 1,800 only 10 times.
Lee said these events were extremely bullish, as they indicate stock-market panic. He said the panic could have been related to Stanley Druckenmiller's warnings about the Federal Reserve, or margin calls, or just "a tired tape."
"While many investors might view Tuesday's plunge and the surge in the VIX as a negative sign, it might surprise you but these are actually bullish signals," Lee said. "Foremost, keep in mind that bull markets 'ride an escalator, and fall down an elevator' ... meaning, in a bull market, stocks rise steadily and then plunge suddenly. Thus, a VIX surge and massive negative NYSE tick reading is positive."
The head of research added that since 1990, and not counting recession periods, the S&P 500 had returned an average of 10% in the six months after a 40% jump in the VIX. Unless the market is entering a recession, Lee said, a VIX spike this large is "simply a panic/reset."
When the NYSE Tick has dipped below negative 1,800, the S&P 500 has returned an average of 22% over the next six months.
Lee said that this was a great setup for a surge in stocks and that the S&P 500 was likely to jump nearly 6% to reach 4,400 before a pullback is possible.
"Bottom line, we see the VIX spike and TICK index collapse as signs of capitulation. By the way, we think this means investors should rotate out of Technology and into our Epicenter recommended areas," Lee said, referring to his power list of stocks tied to a rebound in the industries hit hardest by the pandemic, like travel, restaurants, and hospitality.