A “baby rally” has emerged in the stock market in recent days, potentially signaling the beginning of a broader year-end surge in stock prices, according to Tom Lee of Fundstrat. Lee pointed to a combination of fundamental and technical factors that provide a positive backdrop for stocks over the coming weeks.
Lee explained that several key developments have set the stage for stock gains in the near term. Among these developments is the soft October jobs report, which, he noted, would be “unequivocally positive” for stock prices. In October, the economy added 150,000 jobs, falling below consensus estimates of a gain of 180,000 jobs. This reduced pressure on the Federal Reserve to raise interest rates promptly, leading to a 15-basis point drop in the 10-year US Treasury yield to 4.50%.
Corporate earnings for the third quarter also contributed to the positive sentiment, with 80% of S&P 500 companies reporting earnings. Of those, 82% surpassed earnings expectations by a median of 7%, according to data from Fundstrat.
Additionally, Lee highlighted several positive developments in the market. The VIX fear gauge dropped from the 20 level to just above 15. Tax loss harvesting trades for mutual funds concluded in October, and long-term interest rates experienced a significant decline.
From a technical perspective, Lee identified structural reasons for potential positive momentum in the coming weeks. He noted that only 23% of stocks are trading above their 200-day moving average, which is a bottom decile reading since 1994. Historically, when stocks have been oversold to this extent, the median six-month forward gain has been 9.7% with an 80% win ratio.
Furthermore, the Nasdaq 100 index saw 15 consecutive days of negative 5-day returns, a phenomenon that has occurred only 14 times since 1985. Excluding the dot-com bubble, this trend led to a median 12-month forward gain of 19% with a 91% win ratio.
Tom Lee concluded that these quantitative and structural factors provide meaningful arguments for the formation of a durable market bottom in late October. If this trend continues, the “baby rally” may strengthen, potentially leading to further gains.
In summary, the stock market’s “baby rally” suggests a promising outlook with potential year-end gains, supported by a combination of favorable economic indicators, corporate earnings, and technical analysis.
