Fundstrat’s Tom Lee: “Bears Are Now Trapped”

Fundstrat founder Tom Lee

Stocks gained again today as the market looked to move past the banking crisis for good. The Dow, S&P, and Nasdaq Composite all climbed significantly higher, led once again by tech.

Sentiment leaned bullish in response to a weaker-than-expected core Personal Consumption Expenditures (PCE) index reading, which rose 0.3% in February vs. 0.4% expected. Core PCE is the Fed’s preferred inflation gauge, so it wasn’t all that surprising to see stocks rise following a CPE index “miss” this morning.

A slowing rate of inflation could cause the Fed to potentially cut rates sooner than anticipated. That’s why rate-sensitive tech names outperformed.

The rally of the last few sessions is “helping to confirm the market’s perception that the problems that brought the market to a crisis of confidence could very well be contained,” said LPL Financial’s Quincy Krosby.

“The semiconductors, [which] have come to be viewed as an important bellwether for global growth, delivered a strong performance.”

Krosby glossed over the fact that AI speculation drove most of the semiconductor gains over the last month. Yes, tech rallied broadly, but the “semiconductor surge” resulted from the releases of ChatGPT and ElevenLabs – two AI projects that became extremely popular in a matter of weeks.

Chipmakers provide the hardware with which creating AI solutions is possible.

Still, Krosby’s right in that semiconductors reflect the attitude of the broader market. Traders are hopeful again after escaping the acute risks of a banking crisis.

That was reflected in the University of Michigan’s most recent consumer sentiment index reading, which saw consumer sentiment slump for the first time since November. But according to Joanne Hsu, the survey director, the Silicon Valley Bank meltdown did not alter sentiment in a significant way.

“This month’s turmoil in the banking sector had limited impact on consumer sentiment, which was already exhibiting downward momentum prior to the collapse of Silicon Valley Bank,” Hsu said.

“Overall, our data revealed multiple signs that consumers increasingly expect a recession ahead. While sentiment fell across all demographic groups, the declines were sharpest for lower-income, less-educated, and younger consumers, as well as consumers with the top tercile of stock holdings.”

Fundstrat founder and Wall Street’s biggest bull, Tom Lee, expects stocks to squeeze higher as a result of the pessimism that has permeated markets and consumers alike.

“The first quarter of 2023 is coming to a close Friday and despite a wrenching banking crisis, the S&P is up +5.5% and up +2.3% for the month of March,” Lee wrote.

“Many skeptics (anecdotally, the majority of our clients) are likely sniffing at these gains, as mere noise until the bear market re-asserts itself. But for reasons outlined below, we believe 1Q23 gains now solidifies that ‘bears are now trapped.'”

He concluded:

“It is the bears who are trapped and could fuel further gains in April.”

About two weeks ago, we also predicted a rally heading into the end of Q2. What analysts remain split on is what happens in Q3 and beyond. Our hypothesis includes a bear market reversal in July or August as a result of a recession. Lee thinks stocks will continue rising as inflation falls, a “soft landing” is achieved, and the Fed cuts rates.

Either of us could be right, or we could both be totally wrong. Regardless, trend-following trading – instead of buying, holding, and hoping – is perhaps more important than ever as investors remain very uncomfortable with the threat of a recession looming overhead.


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