Fundstrat’s Tom Lee literally pleads with investors to not ignore 5 bullish signs forming in the stock market

(MarketWatch) U.S. stocks are headed higher in the next six months, says Thomas Lee.

Lee, head of Fundstrat Global Advisors, doesn’t feel he can overstate that point, noting in a research report dated Friday that investors “ignore at your peril” bullish signs crystallizing in markets despite jitters about international trade conflicts between China and the U.S. that rocked the Dow Jones Industrial Average DJIA, -0.70%, the S&P 500 index SPX, -0.73% and the Nasdaq Composite Index COMP, -0.74% on Monday.

On CNBC, Lee advised investors to back up the trucks and buy assets before they missed out on a big buying opportunity.

Lee says that there are least 5 signs that have been triggered in the past week that have dependably generated an average return for the market of 12% in the last half of a year. 

Those include:

• Fed made its 1st rate cut and since 1971, mean 6M gain
• The Cboe Volatility Index, known as the VIX, term structure (1M-4M) inverted, last 5 of 7 times was the bottom (see chart attached):
• Daily RSI fell below 30, and 6 of the last 6 saw S&P 500 gain sharply
• 3% 1-day drop is sign of panic, since 2009
• A measure of market sentiment shows that the share of bulls less bears -26, since 1987

Digging deeper into Lee’s indicators, the VIX term structure, or VIX futures curve, refers to a set of numbers measuring expected volatility for different time periods, calculated by using expected volatility for the S&P 500 index by using options contracts of varying maturities. As the Cboe explains it, “the concept of term structure is essential in the pricing and trading of VIX futures and options, offering insight into expectations of market volatility in forward contract months conveyed by S&P 500 (SPX) index options prices.”

Because the plot of futures contracts normally slope upward, an inverted curve reflects panic and market capitulation and are often viewed as contrarian indicators, says Lee, estimating that the market tends to rise 8.9% in the following six months after an inversion. 

Meanwhile, the American Association of Individual Investors’ sentiment reading also tends to be viewed as a contrarian indicator: Indeed, bullish sentiment, or expectations that stock prices will rise over the next six months, plunged 16.8 percentage points to 21.7%, according to AAI’s most recent reading. Optimism was last lower on Dec. 12, 2018 (20.9%), the report said, while bullish sentiment is below its historical average of 38.5% for the 24th time this year.

Lee’s conclusion? 

Of course, the Fundstrat strategist isn’t the only one adopting a bullish view on stocks that have enjoyed healthy gains year to date, but seem vulnerable to a number of shocks from trade to weakened economic expansion in major developed economies.

J.P. Morgan’s chief U.S. equity strategists led by Dubravko Lakos-Bujas, said that the picture is likely to brighten further for markets in a Thursday research note: 

“The current macro environment is far from perfect, but macro fundamentals likely justify higher equity prices,” the analysts wrote. 

Currently, markets are wrestling with a barrage of tweets and statements from President Donald Trump, who on Friday said that it’s possible that trade talks between the U.S. and China set for September may not take place and that he wasn’t ready to strike a trade deal. 

Fears of a protracted trade dispute — one that could intensify into a economically disruptive trade war — have been the biggest wild card for investors over the past year. It’s an exogenous factor that could wither even the most bullish predictions. 

Trump at the start of this month pledged to impose 10% tariffs on $300 billion of Chinese goods beginning Sept. 1, kicking off a fresh round of Sino-American tensions.