These ‘panic events’ could soon spell relief for stock markets, says top strategist Thomas Lee
Hold on tight for another bumpy ride on Wednesday. A big reading on U.S. consumer price inflation has topped analysts forecasts, and stock futures are selling off.
Tech futures are getting hit the hardest as investors ponder the possibility of higher rates. The dip buyers pulled the Nasdaq Composite back from the brink on Tuesday, while the Dow Jones Industrial Average DJIA,
But could the worst soon be over?
Providing our call of the day, Fundstrat Global Advisors’ founder Thomas Lee zeroes in on a couple of “panic events” that he believes could signal market capitulation. That occurs when investors dump their holdings, often driven by a correction, leading to a potential bottom for stocks.
In a note to clients that published on Wednesday, Lee explained those events, starting with a 40% surge over two days for the Cboe Volatility Index, or the VIX VIX,
Based on similar instances of VIX spikes since 1990, “unless we are entering a recession, the VIX spike is simply a panic/reset. And this washes out investor sentiment,” said Lee.
His data show that since 1990, the S&P 500 has experienced four bear-market instances and 16 bull-market instances when the VIX has seen a similar two-day surge. The median forward return in those bullish follow-ups has been 1.6%, 6% and 8.7% on a one, three and six-month basis.
The second “panic event” also happened on Tuesday, when the NYSE Tick index, which compares the number of stocks moving up versus down, collapsed to its worst reading since 1999, dropping 2,069 points, said Lee.
He said all nine other worst TICK readings took place during bull-market periods, with the exception of 2001, though he doesn’t think markets are repeating that year, given stocks were already in a downtrend two years before that.
Here, he highlights (circled in blue) what happens after those low TICK readings:
“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. 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,” said Lee.
If a capitulation is en route, he said, investors should rotate out of tech and into so-called “epicenter recommended areas,” referring to economically sensitive companies.
Here are 10 from his list of dozens such stocks: Advance Auto Parts AAP,
Read: ‘No doubt…that we are in a raging mania in all assets’, says Stanley Druckenmiller
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