- A sustained rise in bond yields over the previous week has fueled a decline in the stock market.
- But Fundstrat’s Tom Lee believes the market will doubtless recuperate this week as “textbook chop” units shares up for a large rally.
- Detailed beneath are the seven reasons why Lee thinks the latest stock-market weak point will subside this week.
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The stock market was in risk-off mode final week as a continued spike in bond yields sparked a sell-off in know-how shares.
The 10-year US Treasury yield hit a pre-pandemic excessive of 1.75% and a large decline in oil costs constrained the vitality sector. On prime of that, a speech from Fed Chairman Jerome Powell failed to quell investor considerations about rising inflation.
But Fundstrat‘s Tom Lee described the latest market weak point as nothing greater than “textbook chop” that ought to set shares up for a large rally this coming week, partially pushed by rising vaccine penetration and bettering family confidence, according to a Thursday be aware.
Detailed beneath are the seven reasons why Lee expects the stock market to recuperate its losses and transfer greater this coming week.
1. “We know financial markets have developed inflation anxiety, given the absence of inflation risk for the past 20 years, and arguably the last 40 years. Thus, it is understandable to see ‘fire, ready, aim’ every time interest rates surge,” Lee mentioned.
2. “While 10-yr rates surged [on Thursday], the VIX hardly budged. It was >30 last time the 10-year was above 1.6%. So, we are not seeing hedge funds seeking broader market protection, nor is today necessarily triggering a bigger de-grossing event,” Lee mentioned.
3. (*7*) Lee mentioned.
4. “Friday is a ‘quadruple witching event’ where single-stock, single-stock futures, index options and index futures expire. These are known market instability events due to the gamma hedging and other activities by dealers. Moreover, given the rising popularity of call options, and the associated skew, this quadruple witching likely carries more weight,” Lee mentioned.
5. “The economy is on a far stronger path of recovery than compared to any expectations at the start of 2021. In fact, stimulus checks are only starting to filter into the economy. This is going to be a known positive tailwind for multiple cohorts: retailers, recipients of spending, household confidence (get substantial liquidity) and this ultimately has a positive spillover for stocks,” Lee mentioned.
6. “Epicenter and Cyclicals outperformed in March and today the weakness was far more acute in Technology and Communications Services. These are the crowded growth trades. In other words, this is not a change in market character. This is simply the acceleration of the rotation out of crowded Growth into Epicenter. It is going to be sloppy,” Lee mentioned.
7. “After markets make new highs, a pattern of chop for 7-10 days follows. This certainly is at play today. But as we wrote last week, we think the highest probability is a +10% move to S&P 500 4,300. This is still our base case,” Lee mentioned.
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