A V-shaped recovery in the stock market is likely and could lead to new highs in February, Fundstrat says

• The stock market’s swift decline in January will likely be met with a quick V-shaped recovery, according to Fundstrat.
• Fundstrat sees potential for new record highs to be reached in the stock market next month.
• “The faster the decline, the faster the recovery,” Fundstrat’s Tom Lee said in a Wednesday note.
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The sharp decline in the stock market since the start of 2022 has left many investors on edge, with sentiment plunging to levels not seen since the depths of the COVID-19 pandemic sell-off in March 2020.

But they need to recognize that such a swift decline in the market can be met with as swift of a recovery, according to Fundstrat Managing Partner Tom Lee.

“The faster the decline, the faster the recovery,” Lee said in a Wednesday note. He said the stock market could find its bottom in January, which if reached could lead to record new highs for the stock market in February. 

“We expect a violent bounce to ensue, once stocks have bottomed. And it seems like our strategists are seeing this incremental possibility [of a bottom],” said Lee.

Fundstrat’s head of global portfolio strategy told clients to “buy the bottom” on Monday, while the research firm’s head of technical strategy said a bottom might emerge this week.

“If the correction lasted 14 to 20 days, the bounce to recovery highs will be 10 to 15 days, meaning a low in January points to new highs in February,” Lee explained.

Volatility in stocks picked up following a hawkish pivot by the Federal Reserve last month. The prospect for rising interest rates and a reduction in the Fed’s balance sheet sparked a furious rotation out of the growth stocks that did well in 2020 and into value stocks. The Nasdaq 100 has dropped about 15%, while the S&P 500 is down about 9%.

Backing up Lee’s bullish argument for a swift recovery is the sharp drop in investor sentiment, according to AAII’s weekly survey, which flashed an extreme reading last week and shows that sentiment is near maximum pessimism.

“When investors are bearish, this often points to positive forward returns. The rationale being that by the time everyone is bearish, a lot of bad news is baked in. And thus, equities can form a tradable low,” Lee said.