The stock market mounted a sharp decline of as much as 2% on Tuesday after the January CPI report revealed hotter-than-expected inflation.
But the sell-off likely represents another buy-the-dip moment for investors, and a short-term top has not yet occurred, according to a Tuesday note from Fundstrat’s Tom Lee.
Lee said the garden variety sell-off is a normal profit-taking event. Long-term investors shouldn’t worry because it was sparked by a bad data print that calls into question the bullish 2024 narrative for the stock market that the Federal Reserve will soon cut interest rates.
It’s completely normal for stocks to sell-off on bad news. It’s when the opposite occurs that is most concerning to Lee.
Lee said that the stock market will peak when it declines on good economic news.
“As the adage goes, we will peak when we ‘sell-off on good news’ — we are watching for a top, but this sell-off seems too consensus,” Lee said.
Right now, investors are acting too skittish at any sign of bad news in the economy, usually leading to a swift sell-off. Ironically, that gives Lee confidence that the stock market has yet to peak.
“Sentiment is too quick to turn bearish. Skeptics of inflation, economy, and stock market have been vocal today. This is now what makes a near-term top. At a near-term top, we would expect investors to be adamant that this is a buyable dip,” Lee said.
The thinking goes that when everyone is bullish at the top, there is nobody left to buy, and soon the net sellers outweigh the net buyers. But with so many skeptics of the current stock market rally, as Lee highlighted, there are plenty of people left to be convinced by the market’s strength.
Too much cash on the sidelines is another reason Lee thinks the stock market can still move higher. There is a record $6 trillion sitting in money market funds. On top of that, FINRA margin debt levels are well below their peak and typically surge to a new record as the market peaks.
Altogether, that suggests there’s a lot of cash on the sidelines that could flood into the stock market over time, especially if interest rates move lower.
“There is just too much dry powder on the sidelines. Thus, we think this sell-off dip will be bought,” Lee said.
