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The stock market may feel stretched after its 30% rally, but these 3 indicators say it's not
Matthew Fox
Fri, July 21, 2023 at 6:46 p.m. GMT-4·3 min read
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The S&P 500 appears stretched after its 30% rally, and some investors are calling for a correction.

But according to Fundstrat's Tom Lee, there are still bullish fundamental catalysts on the horizon.

These are the three indicators he highlighted that suggest the stock market isn't as stretched as some may think.

The S&P 500 has surged 30% since its mid-October low, and now some investors are calling for a correction as the rally appears stretched.

While Fundstrat's Tom Lee acknowledged that a typical 5% pullback is possible, he argued in a Friday note that any such decline would be a buyable dip and that the stock market isn't as stretched as some think.

He also said there are upcoming catalysts that should be bullish for the stock market, backing up his idea that any decline in stocks should be bought by investors.

Those catalysts include the upcoming Federal Reserve meeting on July 26, which could see the last rate hike of this cycle. Additionally, Lee is looking to the July 28 release of personal consumption expenditures price data, which should mirror trends seen in the June CPI report that showed inflation is cooling. Finally, Lee expects the July CPI report, scheduled to be released on August 10, to show continued disinflationary pressures.

"The next 2-3 weeks have positive fundamental catalysts that we believe could positively surprise markets. Thus, the correction path has a somewhat narrow window. Meaning, the weakness could reverse by July 26," he said. "Fundamental drives keep us constructive, even as S&P 500 is overbought."

On top of those fundamental catalysts, Lee highlighted three indicators that suggest the stock market isn't overextended.

1. S&P 500 vs. its 200-day moving average
The S&P 500 is 12% above its 200-day moving average, which may appear stretched. But historically, the S&P 500 has traded more than 20% above its 200-day moving average at least eight times since 1970, according to Lee.

"It's a sign of a strong market," Lee said.

S&amp;P 500 moving average
Fundstrat
2. Bearish sentiment among professionals
A recent survey from JPMorgan asked institutional investors the following question: Are you more likely to increase or decrease equity exposure over the coming days/weeks?

Only 17% of respondents said they planned to increase equity exposure, which represents a multiyear low. For context, in January 2022, a whopping 85% said they planned to add more stocks to their portfolio.

Meanwhile, Bank of America's July fund manager survey showed that equities were the most underweight among asset classes, while bonds represented the biggest overweight.

"Institutional investors are still skeptical," Lee said.

Sentiment
JPMorgan
3. Retail sentiment still in early days of turning bullish
While the AAII weekly investor sentiment survey shows retail investors turned bullish in recent months amid the stock market rally, the turnaround is still in an early stage of bullishness.

"Retail has turned bullish but this is after an extended bearishness. Record bearishness," Lee said.

He looked at the 52-week average of AAII's net bull/bear spread, which is at -11.7% and currently mirrors the same level seen in June 2009 and March 1991. Both times, the S&P 500 went on to see extended gains for 10+ years as investors slowly but surely turned more bullish.

Sentiment
Fundstrat
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