Here Are Five Reasons Why the Stock Market May Be Nearing Its End After a Painful Pullback

The performance of U.S. stocks is currently far from favorable. Despite starting with gains, ending the day in negative territory sends concerning signals about the overall health of the market. This downward trend persisted for the fourth consecutive session on Thursday, marking the longest series of reversals in six years and casting doubt on the sustainability of the recent market rally.

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The response to Israel's retaliatory drone strike on Iran further dampened market sentiment, with early indications suggesting that the S&P 500 would begin trading in negative territory. The prevailing mood among traders is undeniably pessimistic. Since reaching its record closing high of 5,254.35 on March 28, the S&P 500 has witnessed a 4.63% decline, while the Nasdaq Composite, heavily weighted towards technology stocks, has experienced a 5.11% drop over the past five sessions alone, representing its most significant five-day percentage decline since December 2022.

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To restore optimism among traders, a dose of bullish sentiment is sorely needed. Tom Lee, Fundstrat's head of research, has often been a beacon of optimism, having accurately predicted the market's surge to record highs earlier in the year. Lee acknowledges the recent somber tone in the market, attributing it to concerns over stubbornly high U.S. inflation, which have driven Treasury yields to five-month highs.

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However, Lee identifies five reasons suggesting that investor deleveraging may be nearing its end. Firstly, he notes that the VIX index, a measure of expected market volatility, has remained relatively subdued, indicating that anxiety levels are not escalating rapidly. Secondly, the VIX futures structure, which had previously inverted amid market declines, is now correcting itself, suggesting reduced probabilities of major near-term volatility events.

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Thirdly, Lee observes that the recent accelerated declines in the S&P 500 over a five-day period often precede a rebound. Historical data shows that such declines have frequently signaled immediate buying opportunities. Additionally, the elevated U.S. equity put-to-call ratio, indicating a preference for protective put options over call options, has historically coincided with market bottoms.

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Lastly, Lee cites technical analysis indicators, such as the McClellan Oscillator, which suggest that market lows may be imminent. While acknowledging the potential risks posed by escalating tensions between Israel and Iran, Lee remains bullish on the fundamental outlook for stocks in 2024, citing robust earnings and substantial cash reserves available for investment.

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Despite initial risk-off reactions to Israel's actions, market movements have since stabilized, with flows into safe-haven assets such as the Swiss franc, U.S. government bonds, and gold subsiding. U.S. stock-index futures have retreated from session lows, while benchmark Treasury yields have seen modest declines. The dollar index has softened slightly, while oil prices have risen, and gold continues to trade around $2,390 per ounce.

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