This is how to know the stock market is approaching the peak, according to Fundstrat's Tom Lee

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  • More and more investors are increasingly concerned that the stock market is in a bubble.
  • The market certainly has a “risk-on” feel as epic short squeezes in names like GameStop unfold.
  • This is how to know when the stock market is approaching its top, according to Fundstrat’s Tom Lee.
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Investors are growing increasingly concerned that the stock market is in a bubble after soaring to record highs amid a global pandemic. 

Legendary investor Jeremy Grantham said last week that the stock market is in a bubble that could inflate further if President Joe Biden’s $1.9 trillion stimulus plan is passed.

“If it’s as big as they talk about, this would be a very good making of a top for the market,” Grantham said, adding that “when you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years.”

And Grantham isn’t alone. According to a recent E*Trade survey, a majority of investors believe the stock market is in a bubble. 

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Out of 904 active investors who manage at least $10,000 in an online brokerage account, 66% of them think the market is either fully or somewhat in a bubble, according to the E*Trade survey. An additional 26% said the stock market is “approaching a market bubble,” while only 8% said stock valuations are “not close to a market bubble.”

The market is certainly in “risk-on” mode, as evidenced by the epic short squeeze in GameStop fueled by a group of retail investors that frequent Reddit’s WallStreetBets forum.

But according to FundStrat’s Tom Lee, the stock market rarely approached a top when everyone is warning about an imminent stock market bubble burst.

Instead, the stock market tends to top when consensus says “there is nothing stopping this market from going higher.” Right now, the opposite seems to be happening, according to Lee.

“We find many skeptical of stocks, that this is all ‘retail driven,’ [and the] plurality of our clients are reluctant to be too cyclically tilted,” Lee explained.

“So I find a pretty health level of ‘bearishness’ out there,” Lee concluded.

Read more: The CEO of the world’s biggest asset manager warns that companies will ‘suffer’ if they don’t cut carbon emissions. Read excerpts from his letter to CEOs.

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