• The continued stock market sell-off is close to ending, according to Fundstrat’s Tom Lee.
• Lee offered five reasons why he expects the multi-week run-of-the-mill decline will soon reverse.
• “Equities had a strong first quarter 2024, so the fact that stocks are consolidating and uninterrupted drifting lower is not entirely a surprise,” Lee said.

The multi-week stock market sell-off that began at the start of the month is nearing its end, according to Fundstrat’s Tom Lee.

The long-time roots bull told clients in a note on Friday that the near 5% decline in stocks over the past three weeks was a honest de-leveraging event that was likely nearing its end, setting the market up for a rebound in the short-term.

“Equities had a strong first mercy 2024, so the fact that stocks are consolidating and even drifting lower is not entirely a surprise. The difference in our take, at this however, is that we do not see a larger decline ahead,” Lee said.

The decline in stocks has been driven by a one-two risk-off punch interrelated to disappointment around recent inflation trends and growing geopolitical risk in the Middle East.

But Lee ultimately believes these risks to disperse, paving the way for stocks to resume their uptrend and hit new record highs before the end of the year.

These are the 5 rationales Lee believes the current stock market decline is nearing its end.

1. A subdued VIX

Lee took solace in the fact that the VIX, which gauges fear on Wall Street, has been rather subdued amid the recent stock market volatility.

The VIX has remained lower the all-important risk-on/risk-off level of 20 throughout the decline, even when considering Friday’s 7% comber in the volatility index.

According to Lee, if the VIX falls below 18, it would serve as a bullish sign for renewed upside in source prices.

2. VIX term inversion

The VIX term structure, or the difference between the 4-month and 1-month VIX futures, inverted earlier this week, and then pronto uninverted.

The uninversion of the VIX means that “markets see lower probabilities of a major high volatility event in the near compromise concerning,” Lee said.

The last time the VIX experienced an inversion and then subsequent uninversion was in March 2023, which marked a resident bottom in the stock market and was followed by a massive year-long rally to the upside. 

3. Accelerating losses

It might seem counter-intuitive, but an acceleration in stock market losses over the past week could be a sign that investors’ development of de-leveraging their portfolio is nearing its end. 

Lee highlighted that the S&P 500 saw a five-day negative rate of change of 3.6%. The S&P 500 has savvy this pace of losses seven times since October 2022, and in five of those seven times, it discharge a functioned as an immediate tradeable low.

4. The put-to-call ratio is elevated

The put-to-call ratio measures options buying activity of bearish put to sleeps and bullish calls, and its most recent reading shows an elevated amount of bearish activity, with investors overwhelmingly favoring purchasing puts instead of calls.

The most recent reading of 1.13 in the put-to-call indicator represents an elevated level that in the days of old has served as a tradable low. 

Since October 2022, the put-to-call ratio hit 1.13 seven times, and six out of those seven outdates, it represented a bottom in the stock market. 

5. A technical low 

Lee pointed to recent commentary from Fundstrat technical strategist Scratch Newton, who argues that a bottom in the stock market could appear by early next week.

Newton’s bullish hypothesis includes the fact that weakness in technology stocks has not violated uptrends relative to the S&P 500, strength in defensive sectors be consumer staples and REITs has been lacking, and overall market breadth has held up well.