Institutional investors have been net sellers of stocks since December but that's actually a bullish signal for equities, according to Fundstrat

• Institutional investors have been net sellers of stocks since December, a bullish signal for the stock market, according to Fundstrat's Tom Lee.
• Institutions have raised $128 billion in cash since December and now have the highest cash balances since June.
• "This [cash] should be viewed as a source of firepower for future buying, hence cash on the sidelines could fuel further upside," Lee said.

A contrarian bullish signal is flashing for the stock market as institutional investors continue to sell equities and raise cash, according to Fundstrat's Tom Lee.

In a note on Sunday, Lee highlighted that since December, institutions have been net sellers of stocks and now have their highest cash balances since June of last year. Institutions raised their cash levels by $128 billion, "which we see as a contrarian positive indicator," Lee said.

While institutions have been raising cash, retail investors have been deploying it, with their cash balances falling by $25 billion since December. "Overall cash balances have been rising over the past three months," according to Lee.

Rising cash balances should be viewed as a source of firepower for the future buying of stocks, "hence, cash on the sidelines could fuel further upside," Lee said.

Besides rising cash balances, Lee expects bearish positioning by institutional investors because stocks have been consistently falling in the final hour of trading. Typically, according to Lee, institutional investors execute the bulk of their trades during the final hour of the day.

Lee expects institutions have been more cautious in recent months for a number of reasons, including high valuations, worries about inflation and rising interest rates, and volatile declines in high-growth tech stocks.

But Lee thinks a broad market correction - that institutional investors are probably worried about - isn't likely, as rolling sell-offs have hit a number of sectors in recent weeks.

"We believe the risk of a broader correction has diminished sharply given the multiple sell-offs seen since the start of 2021," Lee said.

Therefore, Lee is constructive on stocks, as high cash balances, combined with cautious sentiment and rolling corrections, means a "risk-on" environment for the market is possible.

"We are buyers of equities here, and particularly see the most upside in epicenter [cyclical] stocks," Lee concluded.