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Why Wall St. bull Tom Lee thinks the market 'NEEDS TO BOUGHT AGGRESSIVELY'

Bullish traders
Bullish traders

After a long and quiet summer, volatility has returned to the stock market, causing Wall Street’s top strategists to warn that stock prices could tumble by as much as 10%.

But veteran strategist Tom Lee of Fundstrat Global Advisors believes now’s the time to be putting money into the S&P 500 (^GSPC), which is currently down 3% from its Aug. 23 high of 2,193.

“We believe this 3% pullback NEEDS TO BE BOUGHT aggressively,” Lee wrote on Friday. Emphasis his.

Lee considers the simple history of stock price moves.

“Newton’s ‘law of motion’ applies to stocks in mid-September — 90% of time, if stocks up between 5% to 20%year-to-date (YTD), gains continue to year-end (YE),” Lee observed. “Since 1940, to gauge what stocks do between 9/15 and YE is simply look at YTD performance. When stocks are up 5% or better, they rally into YE 87% of the time (90% when between 5% and 20%). When stocks are down YTD (thru Sept), they historically show no further advance until YE.”

Tom Lee observes that stocks tend to rally into the end of years.
Tom Lee observes that stocks tend to rally into the end of years. (Image: FundStrat Global Advisors)

This line of reasoning may be a little oversimplified for most investors, especially considering the lineup of market-moving events going into the end of the year. It’s worth noting that Lee’s study found that the pattern he observed also held during election years.

Lee went further to consider fundamental and economic reasons why markets could rally from here.

“Why is this ‘law of motion’ at work?” Lee wrote. “We believe this law of motion is simply reflecting that whatever forces and factors drive YTD gains, are likely to remain in place into the end of the year. And we see this at work in 2016—(i) global search for carry; (ii) US economy remains on strong footing; (iii) underinvested investors (performance chase) and (iv) contrarian sentiment.”

Lee has 2,325 target for the S&P 500.

Sam Ro is managing editor at Yahoo Finance.
Read more:

Deutsche Bank: ‘An 8-10% S&P decline looms’

Morgan Stanley: ‘We think the US stock market is going higher’

Summer’s over: Markets brace for the fall

Don’t be fooled by the calm in the markets

The stage is set for the next 10% plunge in stocks