Veteran investor Tom Lee believes that despite the recent correction in equities and other risk assets, investors should remain optimistic about the markets. In an interview with CNBC, Lee, who is the head of research at Fundstrat, suggests that the dip in equities, which saw the S&P 500 drop from above 6,000 to 5,832, presents an opportunity for investors to take a long position rather than adopt a cautious approach.

Lee views this correction as another buying opportunity, emphasizing that 2024 has been a year of market strength with few instances of sustained weakness. While acknowledging the painful nature of the pullback on December 18th, Lee believes that the fundamental support for stocks remains intact, making it a favorable opportunity for investors.

Highlighting the volatility index (VIX), which measures the stock market’s expectation of volatility based on S&P 500 index options, Lee notes that it experienced a sharp rise on December 18th. He explains that historically, such a rapid increase in VIX has been associated with market bottoms.

Analyzing the internals of the market over the past ten days, Lee describes December 18th as a capitulatory day due to a 90% decrease in the market and a 75% surge in VIX. He points out that in the 35-year history of VIX, there have only been four instances where it rose 60% in a single day. Within a week, three out of those four times saw the market recover all its losses, while the fourth time took a month.

Lee speculates that the panic selling on December 18th was a result of traders exiting a momentum trade as the year came to an end. Interestingly, the forward VIX-futures curve barely moved, suggesting that people sought protection through VIX on that day.

As of Friday’s close, the S&P 500 was trading at 5,930 points.

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