Monday's market selloff marked a sustainable bottom and stocks should trend higher from here, Fundstrat's Tom Lee says

Monday's market selloff marked a sustainable bottom and stocks should trend higher from here, Fundstrat's Tom Lee says
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  • Monday's market selloff that saw the major averages decline more than 2% should represent a bottom in stocks, Fundstrat's Tom Lee said on Tuesday.
  • "Equities are now severly oversold, and in past setups like this, set the stage for a sustainable bottom," Lee said.
  • Despite Monday's selloff, the S&P 500 held key support levels that suggest the uptrend is still "largely intact," according to Fundstrat.
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The more than 2% decline in stocks on Monday likely represented a "major trading bottom" that should result in stocks trending higher from here, according to a Tuesday note from Fundstrat's Tom Lee.

Monday's "old-fashioned blood bath" was driven by a series of headlines including a lack of progress on a fiscal stimulus deal, a record surge in daily COVID-19 cases over the weekend, and a weak earnings report from German tech company SAP.

But Monday's selloff led to stocks becoming "severely oversold," and in similar situations in the past, this set the market up for a "sustainable bottom," according to Fundstrat.
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The VIX Index surged 18% to above 30, and the 4-hour RSI on the S&P 500 dropped below 30, representing oversold conditions, Lee highlighted.

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"Since April, the 4 times the S&P 500 4-hour RSI fell below 30, we were in the vicinity of a major trading bottom," Lee said.
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And while there may still be a few days left of messy trading, the S&P 500 has continued to hold two key support levels: 3,224 and 3,363. This suggests that the uptrend in stocks is still intact, according to Fundstrat.

From here, investors should expect that the tilt towards stocks is "risk-on" as a near 1,000-point drop in the Dow Jones industrial average just one week prior to the presidential election "sounds like lots of bad news priced in," Fundstrat concluded.
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