TOM LEE: Told you so — these 6 strategies are beating the market hands-down right now

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Tom Lee
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Bloomberg TV

Fundstrat’s Tom Lee is taking a victory lap.

In a note Friday, Lee highlighted six of his strategies and calls that are beating the market right now.

“6 of 6 of our strategies are outperforming the S&P 500 quarter to date, by 170bp-510bp,” he wrote to clients.

Meanwhile, the stock market is trapped in a tight range, and has been for a while now.

Of course, Lee is one of the biggest bulls on Wall Street, and thinks stocks will reach all-time highs by the summer. But he says these six strategies are market-agnostic, meaning they will do well even if stocks keep going nowhere or fall.

However, they would benefit more from a broader rally. Lee included the average second-quarter performance of these strategies on an absolute and relative basis. We’d note that the quarter is only a month old.

Through Friday, the S&P 500 was up 1% year-to-date.

Here are Lee’s strategies:


Laggards become Leaders

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Wikimedia Commons

Explanation: Last September, Lee pointed out that the worst-performing stocks heading into the August sell-off outperform in the post-correction period. Sectors included energy, materials, industrials and technology.

Execution of strategy: Long leisure products, trucking, healthcare services, life science tools. Avoid gold stocks and utilities.

Examples of representative companies: Amerco (parent company of U-Haul), Bio-Rad Laboratories

Absolute performance: 4%

Relative performance: 3.3%


Quality spread rally (BB vs CCC)

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Imeh Akpanudosen / Stringer / Getty Images

Explanation: “As credit conditions ease, the quality spread is similarly narrowing-the spread between CCC (speculative grade) and BB (higher end HY) bonds,” Lee wrote in a note. “This has been historically correlated with improved relative performance of small-cap (vs large)”

Execution of strategy: Buy small-caps over large-caps.

Examples of representative companies: Russell 2000 companies over S&P 500.

Absolute performance: 2.3%

Relative performance: 1.7%


USD outright weakens

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Reuters/Jonathan Ernst

Explanation: “The notion that the U.S. dollar (USD) will continue to appreciate is a widely held consensus view, based on sound economic theory – interest rate differentials suggest higher rate currency appreciates,” Lee wrote. “However, there are several reasons to believe this is not enough to sustain USD gains and the USD could be flatter than market expectations in 2016 (and even outright decline).”

Execution of strategy: Buy stocks with an inverse correlation to the dollar, found in the energy, materials, and telecoms sectors.

Examples of representative companies: Fossil, Caterpillar, Dover, Exxon Mobil

Absolute performance: 3.4%

Relative performance: 2.8%


Credit-conditions easing (on oil bottom)

Explanation: Lee found that in eight of the past nine times that short interest rose as credit conditions eased, the S&P 500 gained a median 12% over the next six months.

Execution of strategy: Buy value with low-quality

Examples of representative companies: Western Digital, Xerox, Zions Bancorporation, Textron

Absolute performance: 4.8%

Relative performance: 4.2%


FANG ends with a “dang”

Explanation: Facebook, Amazon, Netflix and Google – the FANGS – outperformed to prop the stock market in 2015.

Lee wrote in December: “FANGs rarely repeat the following year -average relative 1-yr performance is -290bp. Since 2005, top 10 stocks underperformed the following year by an average of 290bp (48% win-ratio).”

Execution of strategy: Buy Value over Momentum

Examples of representative companies: IBM, 3M, 3D Systems, Hershey

Absolute performance: 1.2%

Relative performance: 5.1%


Stocks are the “new bonds”

Explanation: Facebook, Amazon, Netflix and Google – the FANGS – outperformed to prop the stock market in 2015.

Lee wrote in December: “FANGs rarely repeat the following year -average relative 1-yr performance is -290bp. Since 2005, top 10 stocks underperformed the following year by an average of 290bp (48% win-ratio).”

Examples of representative companies: Cyclicals (Cisco, GE, Caterpillar) Near-Cyclicals (energy/financials) (HSBC, Exxon, JP Morgan) and Defensives (Coca-Cola, Pfizer, Merck, Johnson & Johnson).

Absolute performance: 1.2%

Relative performance: 2.1%


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Lucas Jackson/Reuters

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