- The Evergrande-induced stock market sell-off on Monday could be reversed as soon as this week, according to Fundstrat’s Tom Lee.
- Lee pointed to technicals, contained treasury yields, and retail sentiment as to reasons why stocks will quickly bounce back.
- These are the 4 reasons why stocks are set to rip higher in the wake of the Evergrande debt crisis, according to Fundstrat.
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The S&P 500 fell as much as 3% on Monday after it became clear that Evergrande, China’s second-largest property developer, could default on certain debts. The company has more than $US300 ($AU413) billion in liabilities and its wide array of assets, including unfinished apartment complexes in virtually empty cities, may not cover the difference of what it owes to lenders and investors.
But Lee said in a note on Tuesday that the stock market sell-off could be reversed as soon as this week with several factors coming into play, including a key technical level, a contained dip in treasury yields, and retail sentiment extremes.
These are the 4 reasons why stocks are set to rip higher in the wake of the Evergrande debt crisis, according to Fundstrat.
1. “US Treasuries didn’t get the memo.”
“On the day of the Lehman Brothers event, the 10-year yields collapsed 50 basis points. The US Treasury market bears watching because this is the ultimate safety trade. Even gold hardly got bought [on Monday]. And the 10-year fell a mere 6 basis points yesterday, which as the chart shows, looks like daily volatility,” Lee said.
2. “Monday’s selling was amplified by retail panic.”
“Retail investors have been raising cash for six of the last seven weeks. Since the start of the pandemic, we have not seen this persistent level of liquidation. At the extreme, retail investors getting cautious is a contrarian signal,” Lee said. The AAII sentiment also showed a large jump in negative sentiment, Lee highlighted.
3. “S&P 500 at a key technical level.”
“The slide in the S&P 500 Monday caused it to slip below the 50-day moving average, but as shown below, turned around at the 100-day moving average. Technicals often become key levels, reflecting both the cumulative position of investors and also because many investors focus on technicals. The 100-day moving average seems to be a place where the intraday reversal took place, and since March 2020, it has been a key level,” Lee said.
4. “VIX surge shows a level of fear seen at market turning points.”
“The nearly 40% surge in the VIX took it to a key trendline. This [trendline] has been approached/breached four times since March 2020,” Lee explained. The past two times the level has been reached, the S&P 500 found key support and began to rally.
“Again, we do not want to sound too definitive, but does Evergrande risk tipping the world into a recession? If this was the case, the US Treasury 10-year would be seeing a stronger bid, in our view,” Lee concluded.