Renowned strategist Tom Lee called the market's rebound from its worst-ever crash. He lays out 9 bullish forces for stocks after this week's 'overdue' sell-off, and shares his best strategy for cashing in.

  • Fundstrat research chief Tom Lee, who predicted the market's record-setting rally after the COVID-19 crash, says there are nine pillars keeping stocks strong in spite of the recent sell-off. 
  • Lee thinks another rebound is coming and isn't losing faith in the beaten-down companies he calls "epicenter stocks," which he says will be at the center of an economic recovery. 
  • He says those stocks reached a turning point on Tuesday by virtue of their strong afternoon performance compared to tech giants.
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Investors who are all-in on tech companies and growth stocks might be feeling burned right about now. Tom Lee says there's good news buried in the wreckage.

Lee, the managing partner and head of research at Fundstrat Global Advisors, has been bullish on stocks for months, and he correctly called the dramatic recovery from the historic bear market brought on by the COVID-19 pandemic. Lee wrote in April that the S&P 500 would set new records before the end of the year, and in mid-August, it did.

Throughout, he's been telling investors they shouldn't be afraid to bet on some of the most beaten-down companies on the market. The sharp sell-off that spanned Labor Day weekend hasn't changed his mind. He says there are nine factors that are going to support a recovery from the tech stock downturn.

They are:

  1. The US economy is getting stronger, as shown in manufacturing measurements and jobs data.
  2. COVID-19 cases are decreasing after a sharp increase over the summer.
  3. Scientists and drug developers are making good progress toward an eventual vaccine.
  4. Low bond yields will keep investors in the stock market because "there is no alternative."
  5. Consumers are becoming more willing to go out and spend, which helps the economy.
  6. Stocks usually do well late in the year.
  7. A lot of investors and funds haven't bought into the rally yet, leaving $4.5 trillion in cash "on the sidelines."
  8. Retail investors are still pessimistic, and it will help stocks when they come around.
  9. The Federal Reserve will keep rates low and continue supporting the economy.

Lee has been particularly optimistic about a group of companies he calls epicenter stocks, and he says something important happened with that group on Tuesday: They gained strength relative to FANG stocks as the day went on. That breaks from a recent pattern where the epicenter companies started strong and then faded in the afternoon.

He illustrates that point with this chart, which uses Invesco's S&P 500 High Beta ETF as a proxy for the epicenter stocks and compares it to the NYSE's FANG+ group, which consists of Facebook, Apple, Netflix, Alphabet, Alibaba, Baidu, NVIDIA, Tesla, and Twitter.

"Epicenter stocks gained continuously throughout the day, strengthening into the close — this differs from the rally of the prior 3 days, where epicenter opened strong but faded into the close," he wrote. "It looks like this rotation is actually gaining strength, not weakening."

That surge is a new reason to believe that the rotation is going to work, Lee says.

He splits his epicenter stocks into a few groups. Stocks still in an early recovery stage include travel and entertainment companies like Expedia, Wynn Resorts, and LiveNation, defense, and industrial names like Cummins and Northrop Grumman, financials like Fifth Third and Morgan Stanley, and oil and gas giants Exxon and Chevron.

His "mid stage" recovery stocks include transportation companies like JB Hunt and Union Pacific, machinery companies like Caterpillar, Deere, and Dover, retailers Ross Stores and Ulta Beauty, and Delta Air Lines. "Late stage"  recovery companies include Dollar Tree and auto parts retailers Advance and BorgWarner.

Small- and mid-size recovery stocks he's watching include restaurant chains BJ's and Chuy's, hotels like Hyatt and Marriott, casinos like Caesars and Monarch, and housing-related companies like RH and KB Home.

Read more:

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  • GOLDMAN SACHS: Buy these 19 stocks right now for big future gains once a COVID-19 vaccine is available
  • A UBS real estate-investing chief told us 5 ways investors can profit from the pandemic's transformation of how Americans live and work — including the housing markets poised to boom

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