Markets may have bottomed as investors 'buy the invasion,' Fundstrat's Tom Lee says

Published Fri, Feb 25 202210:56 AM ESTUpdated Fri, Feb 25 202212:49 PM EST

A handful of factors, including stocks' move higher during Russia's invasion, point to markets bottoming around these levels, according to Fundstrat's Tom Lee. Lee, the head of research at Fundstrat Global Advisors, said Thursday's stunning comeback in stocks and a reversal in the Cboe Volatility Index signal that the pain in the market could be coming to an end. Inflation fears, a pivot in the Federal Reserve's monetary policy plan and now the dramatic escalation of tensions between Russia and Ukraine have taken a toll on stocks in recent weeks, said Lee. After news that Russia invaded Ukraine, the S & P 500 was down 15% from its Jan. 3 high, deep in correction territory. However, the market had a "buy the invasion" moment, Lee said in a note. The 500-stock index opened down more than 2.6% on Thursday as investors fled riskier assets and oil prices surged above $100 per barrel. Yet, a sharp reversal occurred later in the day, and the S & P 500 ended the day more than 1.6% higher. Fundstrat pointed out that markets typically sell off into the buildup of a geopolitical escalation, but rally on the day of the invasion. The firm looked at stock movement surrounding the Vietnam war, the Gulf War, the Afghanistan War, the Iraq war and the Crimean Crisis and found that five out of five times, stocks bottom just before the invasion. "Again, the 'buy the invasion' seems to have happened" on Thursday, Lee said. Fundstrat also believes a turnaround in the Cboe Volatility Index, or VIX, on Thursday is a bullish sign for markets. The VIX is seen as a fear gauge for Wall Street, and it spiked above the 37 level on Thursday, before retreating towards the 30 level. "It looks like the VIX might have signaled an upside capitulation yesterday. That is, the seeking of protection got to a level yesterday that could be a sign of exhaustion," Lee said. Lee noted that, after a swing like the one seen in the VIX, the S & P 500 has historically averaged a gain of 1.3% one month later. After three months, that average return grows to 3.4%. Finally, Lee said the major drop in Russia's stock index on Thursday — paired with sanctions from the U.S. — should weaken Russia's economy. This could give investors encouragement to buy into equities. "Russia stock market fell sharply yesterday declining > 38% and this is consistent with the pattern of 2014 (Crimea). The aggressor has seen its stock index fall," Lee said.

Tom Lee, Fundstrat Global Advisors

Scott Mlyn | CNBC

A handful of factors, including stocks' move higher during Russia's invasion, point to markets bottoming around these levels, according to Fundstrat's Tom Lee.