- Wall Street’s fear index is on the verge of closing below a key level that would signal more upside ahead for the stock market, Fundstrat’s Tom Lee said in a note on Friday.
- If the CBOE Volatility Index closes below the 20 level, fund flows into stocks could surge from systematic and quant funds, according to the note.
- “A fall below 20 takes this volatility index to pre-2020 levels and a drop in the VIX would be a risk-on signal,” Lee said.
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There’s more upside ahead for the stock market if Wall Street’s fear index continues its decline below a key level, Fundstrat’s Tom Lee said in a note on Friday.
The CBOE Volatility index, known as the VIX, helps gauge the level of fear among investors and recently traded at 20.55 Friday afternoon. If the index manages to fall below the 20 level, it would be a bullish signal for stocks, according to Lee.
“A fall below 20 takes this volatility index to pre-2020 levels and a drop in the VIX would be a risk-on signal,” Lee said.
Systematic and quantitative investment funds would likely take note of the potential risk-on signal and increase their leverage, which would mean more money flowing into equities, Lee explained.
The VIX index has fallen more than 44% since its late January peak, which was sparked by a record level of hedge fund degrossing as a short-squeeze in names like GameStop and AMC Entertainment led investors to unwind their short positions.
To take advantage of the potential risk-on signal from the VIX, Lee continues to recommend that investors increase their exposure to cyclical stocks that are set to benefit from a post-pandemic economic recovery. Sectors Lee has his eye on include financials, energy, materials, real estate, and industrials, according to the note.
“While there is no assurance that it [VIX] will decline, a move below 20 is our base case for 2021,” Lee said.