Tom Lee released a video over the weekend that makes some pretty interesting points. In the video, he highlights the psychological and behavioral aspects of the current stock market rally, describing it as one of the “Most Hated” rallies of recent years.
I’ve summarized some of the highlights for you:
1. Persistent Investor Doubt:
• Despite the strong upward momentum in the stock market, a large portion of investors still doubt the validity of the rally.
• Instead of looking for positive reasons that could push the market higher, investors are focused on finding negative developments that could cause a decline.
2. Historical Similarities:
Lee draws comparisons to previous market recoveries, specifically:
• Post-COVID rally (March 2020): The market rebounded quickly after the crash, but many fund managers still viewed this rally as a bear market rally.
• Late 2022 Recovery: Similarly, many investors thought the recovery after the market bottomed in October 2022 was temporary.
3. The Cyclical Nature of Emotional Trends:
• An important observation: Investors typically “turn optimistic” only when the market reaches new highs.
• They hold out for most of the rally and only start to regain confidence once the technical peak is passed.
• This psychological pattern causes investor participation to lag, creating what Lee calls “hate-fueled rallies.”
4. Current Market Position:
• The market is currently 17% above recent lows and just 3% below all-time highs.
• Lee predicts that investors will quickly turn optimistic once recent highs are passed.
Bullish Counter Signals
In this section, Lee presents his bullish analysis from a contrarian perspective, arguing that some indicators that appear bearish on the surface are actually signals of buying opportunities:
1. Fund Manager Positions (Bank of America Survey):
• U.S. stocks are the least heavily weighted asset class among global fund managers.
• This indicates an overly cautious attitude — a classic contrarian signal that suggests that negative expectations are already priced in.
2. Hedge Fund Behavior:
• Hedge funds are increasing their short positions in stock futures at a record pace — the fastest increase in the past decade.
• This suggests that a great deal of pessimism about the market is already being reflected in prices, according to Lee.
• If market sentiment changes or bearish expectations fail to materialize, these investors may be forced to close their positions — leading to a short squeeze.
3. The Effects of Pessimistic Positions:
• With investors and hedge funds taking such a negative position, any positive development or continuation of the current momentum could lead to a dramatic turn in sentiment.
• Lee sees this as a “bullish undercurrent”: When everyone expects the worst, the upside potential increases.
4. Expectations in Pullbacks:
• Due to these extremely negative positions, according to Lee, any possible short-term declines will remain shallow, as the market is currently “climbing the wall of concern.”
5. Bitcoin’s Leading Signal:
• Bitcoin reached new highs before the S&P 500.
• Lee sees this as a positive leading indicator, emphasizing that Bitcoin’s movements usually precede major index trends.
• He attributes this to the increasing global liquidity that feeds both the crypto and stock markets.
I definitely recommend watching the video to better understand the subject with graphics:
