We have said repeatedly over the course of the first quarter of this year that a bullish wave in stocks would return, based on our indicators (here, here and here). Throughout all our writings, we favored a bullish outcome, based on the indicators in our methodology.
Well, we got news for you, dear reader, our analysis appears to be spot-on, as the stock market is turning strongly bullish.
Let’s revisit 3 stock market charts which make our point clearly, and show bullish indicators.
First, market breadth has turned hugely bullish since April of this year. One of the key indicators in our methodology is the advance minus decline issues in the NYSE. As seen on the first pane of the next chart, a strong breakout took place in April of this year, which appears to be a precursor for a breakout in the NYSE (which was confirmed last week). This is very strong price action, based on the fact that market internals are leading the index.
A second stock market chart is based on intermarket analysis: stocks (risk) have a preference compared to bonds (safety). As long as the bonds to stock ratio (chart below) remains in the triangle chart formation, stocks are in favor, at least from a long term perspective.
The third stock market chart is a risk indicator reflected by the high yield corporate bonds (HYG). The chart tells us that risk appetite is returning. We see exactly the same setup as on the first chart: a breakout took place after a retracement of +1 year. Last week, the HYG climbed above its 90 week moving average, which is a meaningful event, as that coincides with the first sign of a slope change of the 90 WMA from flat to positive.
From an anecdotal point of view, we read in Sentimentrader’s latest newsletter that options traders don’t embrace this stock market rally. “The smallest of options traders bet heavily against stocks last week. On Tuesday, the ISE exchange reported that traders bought more puts than calls on stocks, despite large gains. This is highly unusual.”
Interestingly, as all our indicators are flashing BUY signals for stock markets, we believe that the bearish positions from option traders could result in a sharp short squeeze, which we really believe is near.
Our indicators confirm a strongly bullish sentiment is returning, and stock markets are the place to be in the second half of this year.