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A “baby rally” has unfolded in the stock market that could be the start of a broader year-end rally.
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That’s according to Fundstrat’s Tom Lee, who highlighted fundamental and technical reasons for a rally.
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“There are a few structural reasons to expect stocks to have some positive traction in coming weeks,” Lee said.
A recent surge in stock prices, known as the “baby rally,” may be signaling the beginning of a larger year-end uptrend in the market.
This prediction comes from Tom Lee, an analyst at Fundstrat, who has identified multiple fundamental and technical factors that suggest an increase in stock prices over the next few weeks.
Lee states, “Recent macro developments have been favorable, setting the stage for stocks to gain in the near-term. Although it’s currently a ‘baby rally,’ it has the potential to evolve into something bigger.”
One supportive factor is a weaker-than-expected October jobs report, which Lee believes will have a positive impact on stock prices. In reality, this is exactly what happened, with the economy adding 150,000 jobs compared to the estimated 180,000 jobs.
This softer jobs report gives the Federal Reserve more flexibility in determining interest rate adjustments. As a result, the 10-year US Treasury yield dropped 15 basis points to 4.50% after reaching a multi-year high of over 5% the previous week.
Furthermore, corporate earnings for the third quarter have been overwhelmingly positive. Currently, 80% of S&P 500 companies have reported earnings, with 82% of these companies beating estimates by a median of 7%, based on data from Fundstrat.
Lee also highlights other positive factors in the market, such as the fear gauge (VIX) dropping from 20 to just above 15, the conclusion of tax loss harvesting trades for mutual funds in October, and a significant decrease in long-term interest rates.
From a technical standpoint, Lee believes there are several structural reasons for the market to gain positive momentum in the coming weeks.
For instance, the percentage of stocks trading above their 200-day moving average has fallen to just 23%, a bottom decile reading since 1994. Historical data show that when stocks have become oversold like this, the median six-month forward gain is 9.7%, with an 80% win ratio.
Additionally, the Nasdaq 100 has experienced 15 consecutive days of negative 5-day returns. This has only happened 14 times since 1985, and excluding the dot-com bubble, the median 12-month forward gain was 19%, with a 91% win ratio.
Lee concludes, “These are significant quantitative and structural arguments supporting the notion that a durable bottom was formed in late October. If this is the case, it provides a strong case for the ‘baby rally’ to strengthen.”
Read the original article on Business Insider
