Super bull Tom Lee: VIX sends a rare signal, S&P 500 may surge to 7,400 points

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Tom Lee, a well-known Wall Street bull and Head of Research at Fundstrat, has just issued a bullish signal, citing the rare movement of the VIX fear index to determine that U.S. stocks have confirmed a bottom, and the S&P 500 Index is expected to reach 7,400 points within the next six months.

In his latest report released Thursday night, Lee pointed out that the VIX closing below 20 is the third bottom confirmation signal he has observed, after the market "bounced back ahead of bad news" and "marginal improvement" in geopolitical conditions.

He stated, "This matches our earlier view that the S&P 500 could surge to 7,300 before a larger pullback."

This statement comes as U.S. stocks registered seven consecutive gains. Although U.S. crude oil futures prices are still hovering near $100 per barrel, the U.S.-Iran ceasefire agreement remains fragile, the Strait of Hormuz situation has not fully eased, and the S&P 500 is only 2.2% below the all-time closing high set at the end of January, with a cumulative rebound of about 7.6% in the past two weeks.

VIX Drop Again Confirms Market Bottom

Lee’s bottom judgment is based on the combination of three signals.

First, the stock market has started to react positively to "bad news." This round of the rebound began before the U.S.-Iran ceasefire deal was reached, and during the process, the market's sensitivity to rising oil prices noticeably decreased. Lee pointed out, "Correlation has reversed"—while oil prices rose, the S&P 500 climbed from 6,300 to 6,600.

Second, although the outlook for the war remains unclear, there has been "marginal improvement," which is a positive for market psychology in itself.

Third, and most recently, the VIX index closed below 20 for the first time on Thursday, after having surged above 30 in March. Lee believes this indicates that investor demand for protection via the options market has peaked and market sentiment is systematically recovering.

Historical Review: Current Market Combination Corresponds to 9.2% Six-Month Return

Lee further supported his view with historical data to assess the statistical significance of the current signals.

Since 1990, there have been four occurrences of the following sequence: the VIX closes above 30, oil prices subsequently fall by more than 15%, and then the VIX closes below 20. Taking the day the VIX falls below 20 as a benchmark, these events happened on February 15, 1991; March 1, 2002; May 9, 2003; and February 12, 2021.

Lee calculated that during these four instances, the S&P 500’s median forward returns were: 1.3% in one month, 2.6% in three months, and 9.2% in six months. Based on current levels, a 9.2% six-month median increase corresponds to an S&P 500 value of about 7,400 points.

Sector Allocation Adjustments: Energy and Materials Downgraded

As Lee incorporates "war bottom has emerged" into his baseline assumption, his sector allocations have also changed accordingly.

The energy and materials sectors have been downgraded from top picks to fifth priority, on the logic that after the geopolitical premium fades, the attractiveness of sectors that previously benefited from high oil prices will diminish.

Lee’s current top four sector picks are, in order: the "Magnificent Seven" U.S. tech giants, industrials, financials, and small caps.

Market Context: Fragile Ceasefire, Inflation Rebounds

Despite improving bullish sentiment, macro risks in the market remain.

The stability of the ceasefire agreement is being questioned. U.S. President Trump has demanded Iran fully open the Strait of Hormuz, but it remains closed for now.

According to Xinhua News Agency today, Iran’s armed forces said they are ready to open fire at any moment. A spokesperson for the Central Headquarters of Iran’s Khatam al-Anbiya said on the 10th that due to repeated untrustworthiness by the U.S. and Israel, Iranian forces remain on full alert and ready to fire at any time.

On the inflation front, the U.S. Consumer Price Index (CPI) rose 3.3% year-on-year in March, in line with market expectations but a significant jump from 2.4% in February.

Risk Warning and DisclaimerThe market has risks, and investment needs to be cautious. This article does not constitute individual investment advice and does not take into account individual users’ special investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. If you invest based on this, you are responsible for the outcomes. ```