Jefferies flags 4 charts that show the stock sell-off could soon turn into a new rally

The stock market has appeared particularly volatile lately, with major indexes declining for the fourth consecutive day on Tuesday.

The tech-heavy Nasdaq 100 is down about 5.5% over the last few weeks as investors are starting to grow skeptical about the massive amount of AI infrastructure spending being pumped out by hyperscaler firms.

The S&P 500 also just dipped below its 50-day moving average, a move that last happened in April, when the index plunged 10% in the span of a few days.

But the worst may soon be over, according to Jefferies analyst Michael Toomey.

“I think we’re setting up for a rally,” Toomey said in an email on Tuesday.

Toomey flagged some charts that put the current sell-off in context and make the case that the rally could soon resume.

Here’s what he’s eyeing:

Put/call ratio

Jefferies

The put-call ratio for the S&P 500 is at one of its highest levels in recent months, suggesting investor sentiment is exceptionally bearish.

The ratio measures the number of put options bought for the index — essentially insurance policies that protect investors against downside risk — compared to the number of call options (which allow investors to capitalize on upward moves) being bought.

Excessively bearish positioning is a contrarian signal, suggesting that the next move could be in the opposite direction.

Tech stocks are getting beat up

Jefferies

The above chart shows that 17% of technology, media, and telecommunications stocks have oversold technicals. Most episodes like this have seen peak percentages in the high teens or low 20s. Of course, there are a couple of exceptions, and the current sell-off could be among them.

AAII Bull/Bear

Jefferies

The American Association of Individual Investors puts out an investor sentiment survey. As of last week, 49.1% of investors said they are bearish, while 31.6% consider themselves bullish. That negative gap is the second largest over the last 12 months. It’s another contrarian signal that means the latest sell-off could be in its waning days.

CNN Fear & Greed Index

CNN/Jefferies

Finally, the CNN Fear & Greed Index shows investors are the most bearish they’ve been since the Liberation Day tariff sell-off in April.

Weak sentiment measures can act as contrarian indicators for future stock performance, as they signal that a bottom could be near.

Still, sentiment is only one part of the picture. If fundamentals worsen — if the Fed shifts from its dovish stance, the labor market crumbles, or earnings weaken — the sell-off could just be getting started.