Multiple catalysts exist for S&P 500 upside breakout: Tom Lee

The S&P 500 (^GSPC) is poised to breakout as “positive catalysts are coming into play in the next few weeks,” according to Fundstrat’s Tom Lee.

Stocks sold off last week on the heels of a rising 10-year Treasury (^TNX), as investors rotated out of tech stocks and into cyclical and value plays. However, Lee and his team believe, “Technology made is local bottom a few weeks ago.”

Lee predicts a further rally in technology/growth will help power the S&P 500 towards 4,300, possibly in the first half of 2021.

“Lots of market congestion is out of the way even as the S&P 500 remains overbought,” Lee wrote in a note to investors.

“In any case, last week was a textbook “7-10 chop” that follows a new high,” he added.

Look at the VIX

The VIX (^VIX) surged to 32 when the the 10-year T-note broke above 1.6%. However it “barely blinked” when it went past 1.7%, says Lee.

Source: Bloomberg and Fundstrat

Source: Bloomberg and Fundstrat

Source: Bloomberg and Fundstrat

Source: Bloomberg and Fundstrat

For this reason, Lee believes quadruple witching played a role in last week’s stock movements. If you’re skeptical about that, Lee points to the Quad expiry dates in 2020.

“Notice every major stock bottom, with the exception of the 2020 elections turmoil, took place AFTER the Quad witching date? Yup,” writes Lee.

Source: Bloomberg and Fundstrat

Source: Bloomberg and Fundstrat

Lee also noted a technical head-and-shoulder pattern which played out with the Nasdaq (^IXIC) recently, stating “If the pattern below plays out, Technology/Growth will soon rally.”

This is consistent with Lee’s view that tech stocks made local bottom a few weeks ago and a further rally in tech and growth will help power the S&P 500 towards 4,300.

Some positive catalysts and drivers to look for in the week ahead include:

  • First quarter earning season for 2021 and any surprise higher positive guidance

  • The vaccine penetration expanding in the US

  • The VIX falling (below 20, maybe below 15), even as rates rising

  • Fiscal relief delivered to Americans thus adding liquidity to the markets.

On Monday the tech and communication services sectors led a rebound in the Nasdaq as the 10-year treasury note eased.

Yahoo Finance Premium

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Ines covers the U.S. stock market. Follow her on Twitter at @ines_ferre

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