Top Bull Tom Lee: VIX Issues Rare Signal, S&P 500 May Surge to 7400 Points

Wall Street's well-known bull, Tom Lee, head of research at Fundstrat, has issued a new bullish signal, citing a rare movement in the VIX fear index to judge that the US stock market has completed its bottom confirmation, and the S&P 500 index is expected to reach 7400 points within the next six months.

In his latest report released on Thursday evening, Lee pointed out that the VIX index closing below 20 is the third bottom confirmation signal he has observed, following "the stock market's prior rebound amidst bad news" and "marginal improvement in geopolitical tensions."

He stated, "This aligns with our previous assessment that the S&P 500 might reach 7300 points before a larger correction."

This statement comes as the US stock market records seven consecutive days of gains. Despite US crude oil futures prices hovering near $100 per barrel, the ceasefire agreement between the US and Iran remaining fragile, and the situation in the Strait of Hormuz not fully resolved, the S&P 500 index is only 2.2% below its historical closing high set at the end of January, having rallied approximately 7.6% in the past two weeks.

VIX Decline Further Confirms Market Bottom

Lee's assessment of the bottom is built on the superposition of three signals.

First, the stock market has begun to react positively to "bad news." This rally started before the US-Iran ceasefire agreement, and the market's sensitivity to oil price increases has significantly decreased during this period. Lee noted that "the correlation has flipped" – as oil prices rose, the S&P 500 index climbed from 6300 points to 6600 points.

Second, although the future outlook of the war situation remains uncertain, it has "marginally improved," and in terms of market psychology, "marginal improvement itself constitutes good news."

Third, and the latest signal: the VIX index closed below 20 for the first time on Thursday, after having surged above 30 in March. Lee believes this indicates that investors' behavior of seeking protection through the options market has peaked, and market sentiment is undergoing systematic repair.

Historical Review: Current Market Combination Corresponds to 9.2% Six-Month Return

Lee further supports his assessment with historical data to evaluate the statistical significance of the current signals.

Since 1990, there have been four instances of the following combination: VIX closing above 30, followed by a drop in oil prices exceeding 15%, and then followed by the VIX closing below 20. Based on the day the VIX closed below 20, these four instances occurred on February 15, 1991; March 1, 2002; May 9, 2003; and February 12, 2021.

Lee calculated that the median forward returns for the S&P 500 index in these four situations were: 1.3% at one month, 2.6% at three months, and 9.2% at six months. Based on current levels, a median six-month increase of 9.2% corresponds to approximately 7400 points for the S&P 500 index.

Sector Allocation Adjustment: Energy and Materials Downgraded

As Lee incorporates the "war bottom is in" into his base assumptions, his sector allocations have also been adjusted.

The energy and materials sectors have been downgraded from top-tier to fifth priority, based on the logic that with the dissipation of the geopolitical risk premium, the attractiveness of sectors that previously benefited from high oil prices has diminished.

Lee's current top four preferred sectors, in order, are: the "Magnificent Seven" stocks, industrials, financials, and small-cap stocks.

Market Background: Fragile Ceasefire, Resurging Inflation

Despite the rising bullish sentiment, the macroeconomic background facing the market still harbors concerns.

The stability of the ceasefire agreement is in question. US President Trump has demanded that Iran fully open the Strait of Hormuz, but the strait remains closed for now.

According to a Xinhua News Agency report today, the Iranian Armed Forces stated they are ready to fire at any time. A spokesperson for the central headquarters of the Iranian Armed Forces, Hatam-ol-Anbiya, issued a statement on the 10th saying that due to the repeated breaches of trust by the United States and Israel in the past, the Iranian Armed Forces remain on full alert and are ready to fire at any time.

In terms of inflation, the overall US Consumer Price Index (CPI) for March rose 3.3% year-on-year, in line with market expectations, but a significant jump from 2.4% in February.