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Fundstrat says the stock market just delivered an extremely rare signal that has a solid track record for further strong gains

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  • On Tuesday, an extremely rare signal flashed in the stock market indicating that big gains are ahead.
  • That’s according to Fundstrat’s Tom Lee, who highlighted the rise in the put-to-call ratio despite a jump in the S&P 500.
  • Since 1997, there have been only three times when the put-to-call ratio has risen above 1.0 on the same day the stock is up 1%.

The stock market showed an extremely rare contrarian signal on Tuesday, and it suggests strong gains ahead, Fundstrat’s Tom Lee said in a Wednesday note.

Lee stressed that the put-to-call ratio rose above 1.0 on Tuesday, the same day the S&P 500 rose more than 1%. This is a headache because the put-to-call ratio typically rises on days when the stock market is down, not days when there are strong gains.

The put-to-call ratio is a technical indicator that helps measure investor sentiment. A measure of 1 for the put-to-call ratio indicates that the number of buyers of bullish call options is the same as the number of buyers of bearish options. A measurement of more than 1 for the ratio indicates that there are more put buyers than call buyers, suggesting that investors are more bearish than bullish towards the stock market.

“Bounce In” [the] The CBOE put-to-call ratio usually occurs on falling days. It makes sense: markets are falling, investors want to hedge, [so they] Buy puts,” Lee said. The put-to-call ratio rose from 0.64 to 1.35 on Tuesday, according to data from YCharts. Meanwhile, the S&P 500 gained about 1.4%.

According to Fundstrat, there have been only three other instances since 1997 of the put-to-call ratio breaking above 1 on the same day the S&P 500 rose more than 1%.

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Lee said of those three dates, “The expected return on equity is very, very good.”

Those examples are February 1997, November 2008, and March 2020. All three dates saw significant stock market volatility over the coming months and years.

According to Lee, the S&P 500 delivered average forward returns of 3.7%, 17.5% and 35.8% over the next three, six and 12 months, respectively, positive forward returns over six months and 12 months.

That, combined with the strong weather at the end of the year, gives Lee confidence that the S&P 500 could rise to 4,500 by the end of the year, or about 12% from its current level.

Source: markets.businessinsider.com

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