According to Fundstrat, this is when you know the stock market has peaked

• According to Fundstrat, the stock market is unlikely to hit an all-time high after January’s better-than-expected CPI report.

• The company said there are too many bullish factors to suggest this is another bullish buy-type decline.

• Fundstrat says it’s only now that investors really need to worry that the stock market has peaked.

Stock markets plunged as much as 2% on Tuesday after January’s Consumer Price Index (CPI) report revealed higher-than-expected inflation.

But the decline likely represents another bull-buying moment for investors, with a short-term ceiling yet to emerge, according to a Tuesday note from Fundstrat’s Tom Lee.

Lee said the garden variety crash is a normal profit-taking event. Long-term investors need not worry, as this was caused by a bad data print that casts doubt on the stock market’s 2024 bullish narrative that the Federal Reserve will soon cut interest rates.

It’s normal for stocks to plummet when bad news comes out. What concerns Lee most is when the opposite happens.

Mr Lee said the stock market peaks when it declines following good economic news.

“As the saying goes, ‘good news sells’ is the peak. We’re aiming for the ceiling, but this sell seems too much of a consensus,” Lee said.

Investors are now too cautious when there is a sign of bad news in the economy, and they usually sell off quickly. Ironically, this gives Lee confidence that the stock market has not yet peaked.

“It is too early for sentiment to turn bearish. There is a lot of skepticism about inflation, the economy, and the stock market today. This is what creates the near-term ceiling. The house will be adamant that this is a buyable decline,” Lee said.

The idea is that if everyone is bullish at the top, there will be no buyers, and the net sellers will soon outnumber the net buyers. However, as Mr. Lee emphasized, there are still many people who are confident in the strength of the market, as there are so many people who are skeptical about the current stock market rally.

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The surplus of cash is another reason Lee thinks the stock market can still rise. A record $6 trillion is sitting in money market funds. On top of that, FINRA margin debt levels are well below their peaks and typically spike to new records when the market peaks.

Taken together, this suggests that there could be a lot of cash flowing into the stock market over time, especially if interest rates fall.

“There’s too much dry powder on the sidelines. So this downside push will be bought,” Lee said.

Read the original article on Business Insider