On the Horizon: Five Reasons to Believe the Stock Market’s ‘Painful’ Retreat Is Coming to a Close

The performance of U.S. stocks lately isn’t exactly flattering. Despite starting strong, they consistently close lower, sending concerning signals about the overall market health. Thursday marked the fourth consecutive session where the S&P 500 experienced this reversal trend, the longest such streak in six years, indicating significant underlying issues despite recent rallies.

Even amidst Friday’s early downturn in stock index futures following geopolitical tensions between Israel and Iran, there’s a silver lining: the S&P 500 seems poised to open in the red. Nevertheless, the prevailing sentiment is undeniably pessimistic.

Since reaching its peak close on March 28, the S&P 500 has declined by 4.63%, while the Nasdaq Composite, dominated by tech stocks, has seen a 5.11% drop in just five sessions, marking its most significant five-day percentage decline since December 2022.

What traders could really use right now is some optimism to uplift their spirits. Enter Tom Lee, Fundstrat’s head of research, who has a track record of accurately predicting market surges. Lee acknowledges the recent bleak market activity, attributing it to a painful deleveraging process exacerbated by concerns over persistent U.S. inflation and geopolitical tensions.

Despite the gloom, Lee identifies five reasons why investor deleveraging might be nearing its end:

1. The VIX index, often referred to as Wall Street’s fear gauge, remains relatively subdued, signaling that anxiety isn’t escalating rapidly.
2. The VIX futures structure is normalizing, with the near-term future price now aligning with expectations, indicating reduced immediate volatility concerns.
3. Historical patterns suggest that the current accelerated declines in the S&P 500 could soon lead to a rebound, particularly given the current context of the VIX term structure.
4. The U.S. equity put-to-call ratio is high, indicating a strong demand for protective put options, which historically precedes market recoveries.
5. Technical analysis indicators, such as the McClellan Oscillator, suggest that a market low might be imminent, according to Fundstrat’s technical expert Mark Newton.

Lee acknowledges the potential risks posed by escalating conflicts, such as the recent tensions between Israel and Iran, which could adversely impact equities and other cyclical assets. However, he maintains that the fundamental case for stocks in 2024 remains robust, supported by improving earnings and a substantial amount of sidelined cash, totaling $6 trillion.