I have been calling for an oversold rally to start in the past week. Even though my calls were early, it seems that a V-shaped bottom and meltup is in process. In my last weekend post (see 2015: Bullish skies with scattered periods of volatility), I pointed to the combination of VIX term structure inversion and TRIN over 2 as a virtually certain bottom calling indicator.
The chart below shows the past instances, marked by vertical lines, when this indicator has generated buy signals. The blue lines indicate past episodes when it successfully marked a short-term bottom in the last four years and the red line shows the one time when it failed.
In addition, I have been watching the levels of NYSE new 52-week highs (green) and 52-week lows (red). Most recently, the new low count has spiked to extraordinarily high levels and then retreated. I have marked with vertical lines the past occurrences of this condition in the last four years. Each of those episodes were associated with V-shaped bottoms and subsequent rallies to new highs in the SPX.
If history is any guide, we should see Santa Claus bring investors new highs in the major US equity averages, either before year-end or shortly into 2015. As the stock market has been on a tear in the past two days, it would not surprising to see it pause Friday and possibly stage a minor pullback. Should that happen, it would provide a good entry point for traders who missed have missed this powerful rally to get long.
Disclosure: Long SPXL, TNA