Market decline

Buy the dip as the bear market decline is almost over

  • The bear market in equities is coming to an end as duration matches historical declines, said Tom Lee of Fundstrat.
  • He thinks the “buy the dip” regime has returned to the stock market and the bottom has been reached.
  • The previous bull market from March 2020 to January 2022 was short, so “it makes sense that it was a short bear market,” Lee said.

The bear market in equities is almost over, according to by Fundstrat Tom Lee, who told clients in a note on Wednesday that there was a good chance the bottom would be bottomed out and a “buy the dip” pattern would return.

Lee’s confidence in his call that the bear market is essentially over is based on past bear market declines and the fact that these are ultimately retracements of past bull market cycles. “A bear market is [an] relax [of] previous gains,” he said.

Fundstrat has found that since 1942, the median duration of a bear market is 21% of the duration of its previous bull market, while the average is 31%.

Meanwhile, the last bull market from March 2020 to January 2022 lasted 651 days, while the current bear market for stocks lasted 164 days, or 25% of the previous bull market.

“Many investors believe that this bear market needs ‘longer’. But given the brevity of the previous 651-day bull market against [the] median [bull market of] 1,309 days, the corresponding bear market should also be shorter,” Lee said.

This, combined with Lee’s view that the stock market already experienced its fundamental capitulation in mid-June, means that a “buy down” regime is back and is likely to generate strong returns for investors in the future.

When more than 54% of S&P 500 stocks are down more than 20% from their 52-week highs, futures yields are very strong. That benchmark was met on June 17, when 73% of S&P 500 stocks fell more than 20% from their record highs.

“In 3 months, 6 months and 12 months, the best decile for returns is when that number is oversold [greater than] 54%, so buy dip regime is in effect,” Lee said. These futures yields amounted to 7.6%, 11.3% and 20%, respectively, with a positive win ratio of at least 73%.

“In our conversation [with clients], most cite fundamental risks: Inflation is still high, recession is still ahead, EPS downgrades are coming, too short to be a true bear, the Fed is still climbing. Although many quote this, look at how well stocks react to incoming news,” Lee said.

“If investors brace for the worst, the bad news itself has less impact, argues to ‘buy the dip’”.