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Tom Lee: History shows that stocks may revisit the Christmas Eve low

Scott Gamm

Christmas Eve was a nightmare for stocks, with the S&P 500 (^GSPC) tumbling 19% from its 2018 to a closing low of 2,351.

On Friday, the S&P was trading at around 2,580.

Unfortunately, we might be headed back to the 2018 lows again in 2019, according to Fundstrat’s Tom Lee

“In short, we believe that the crash of 2018 mirrors the mid-life crisis seen during the middle of bull markets a la 1962 and 1987 and in both bases, the bull market found its footing at the 200-week moving average,” Lee wrote in a note to clients. “That is currently [S&P 500] 2,350 or so. And both midlife crises saw a retest at that level. Is a retest in 2019 possible? Yes, but if so, we would view that as a buying opportunity.”

Retests are staples of market selloffs. After all, prior to the December 2018 meltdown in stocks, the market plunged in February and October. In both cases, the S&P 500 retested its low in the following weeks. The market has yet to revisit its Dec. 24 dip.

Meanwhile, Lee is bullish on stocks in 2019 and expects the S&P 500 to end 2019 at 2,850.

That represents about 10.5% upside from the index’s current level of 2,580.

From 2,351, Lee’s target equates to a 21% surge.

There are a few fundamental themes set to drive upside for stocks, according to Lee.

First, Lee is bullish on FANG stocks - that is, Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOGL). FANG, Lee said, historically performs well during odd number years.

Demographics may also boost the stock market. Millennials drive over 50% of GDP growth, according to Lee. The stocks Lee sees levered to this cohort include Tesla (TSLA), PayPal (PYPL) and Square (SQ), among others.

Lee is also overweight on stocks that benefit from automation and artificial intelligence. Included in this long list are Nvidia (NVDA), Amazon, Kohl’s (KSS), and Dollar General (DG), among others.

The two major downside market risks Lee sees include a possible central bank policy error, which has historically led to a steep decline in stocks.

Plus, the inversion of the yield curve — notably the 10y/2y or the 30y/10y — is another big risk for stocks.

“Fortunately, neither is inverted yet,” he wrote.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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