Fundstrat's Tom Lee Sees 4 Indicators Suggesting Stock Market Bottom

Fundstrat’s head of research, Tom Lee, has identified four key indicators suggesting that the stock market may have reached its bottom and is poised for a bullish reversal. These indicators, highlighted in a recent video update, provide a comprehensive view of the current market conditions and offer insights into the potential for a market turnaround.

One of the primary indicators Lee noted was the triggering of a Zweig breadth thrust on the S&P 500 index on April 24th. The Zweig breadth thrust is an indicator that attempts to detect the early stages of a potential bull run by dividing the 10-day moving average of the number of advancing stocks by the total number of stocks. According to Lee, this indicator has historically been a reliable signal of imminent stock market rallies. Since 1978, there have been 11 instances where the Zweig breadth thrust was triggered, and in each case, the stock market experienced gains one month, six months, and 12 months later.

Another significant development Lee pointed out was the retracement of 50% of the widening in high yield options adjusted spreads (OaS) on April 23rd. A narrowing of credit spreads, which is the difference in yield between riskier junk bonds and “risk-free” government bonds, typically indicates stability and a healthy investor risk appetite. Lee emphasized that this development suggests a reduction in recession risk, as the high yield spreads have reversed almost all the widening back to levels seen before April 2nd.

Lee also observed that the S&P 500 experienced two consecutive days where 90% of its stocks rallied. This event has historically led to further upside in the market. Since 1979, there have been three instances where stocks posted two days of advancing gains of 90% or more within a couple of days apart, and in each case, the market was higher three, six, and 12 months later.

Lastly, Lee noted that the volatility index (VIX), a measure of market volatility based on data from the Chicago Board Options Exchange, closed below the 31 level. According to Lee, this signals a drop in future volatility and likely strength for equities. The VIX is now indicating a more stable market environment, which is generally favorable for stock performance.

Lee’s analysis provides a comprehensive view of the current market conditions, highlighting several key indicators that suggest a bullish reversal may be underway. These indicators, including the Zweig breadth thrust, narrowing credit spreads, consecutive days of strong stock performance, and a drop in the VIX, all point to a potential turnaround in the stock market. Investors should consider these factors as they evaluate the market’s future direction and make informed investment decisions.