A 'violent' rally is coming for US stocks this month after the sell-off went too far, Fundstrat's Tom Lee says

• Fundstrat's Tom Lee has said investors should brace for a "violent" rally in February after January's sell-off.
• He said there are growing signs the drop in stocks went too far and that investors could pile back in.

The sharp falls in January have set US stocks up for a "violent" rally in February as investors return to the market armed with piles of cash, Fundstrat's Tom Lee has said.

"The awful decline for markets in January, in my view, is setting up for a strong February," Lee wrote in a note Monday night. "The faster the decline, the faster the bounce."

His comments came after stocks jumped during Monday trading, with the S&P 500 finishing 1.89% higher and the tech-heavy Nasdaq 100 rising 3.29%.

Lee, formerly JPMorgan's chief equity strategist, said growing pessimism among retail investors in recent weeks was in fact a contrarian signal that suggests stocks are due a rapid rebound.

He said retail traders had raised large amounts of cash, giving them ammunition to pile back in when they think the worst is over.

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The strategist also pointed to a closely-watched technical indicator on the S&P 500 called the relative strength index, which has fallen to its lowest level since the sell-off of March 2020. He called it a "buy signal" that investors have gone too far with their selling.

US stocks have fallen sharply in 2022 as the Federal Reserve prepares to hike interest rates and cut off its support for the economy, in response to red-hot inflation.

The S&P 500 has dropped more than 5%, while the Nasdaq 100 has tumbled 8.5% this year so far. The declines would have been heavier were it not for Monday's sharp rally, which followed another up day on Friday.

"In general, this is a poor start for 2022, but we don't see this boding poorly for the full year," Lee wrote.

He said Fundstrat is sticking to its year-end S&P 500 target of 5,100. That's 13% higher than Monday's closing level of 4,515.55.