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3 Reasons to Remain Bullish

Schaeffer's Senior Technical Strategist takes a look at three indicators that have reached extreme levels

by 6/29/2012 7:45:51 AM
Stocks quoted in this article:

Recently, I've noticed three indicators flashing levels last seen during the March 2009 lows. I don't know about you, but anytime I read 'last seen during March 2009,' I perk up and take note. Now just because an indicator is matching an historical low in the S&P 500 Index (SPX) doesn't mean we should go out and buy hand over fist, but it sure is worth knowing about.

First off, as I noted in Monday Morning Outlook last weekend, the 10-day equity-only buy-to-open put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) was at its highest point since March 2009. Also, it was in the process of rolling over from these extremely high levels, suggesting extreme fear might have peaked, and historically these rollovers have been great buying opportunities. Well, the good news is this ratio has continued to trend lower so far this week. Below is an updated chart. (Click the chart below to enlarge).

Click to Enlarge

Next, short interest on all optionable stocks has actually just exceeded the amount of short interest we saw back in March 2009. This is yet another sign there are a lot of bearish bets out there, and with any improving price action, there is plenty of room for those shorts to cover, causing a huge rally.

Short Interest Versus All Optionable Equities Since January 2008

Lastly, the recent American Association of Individual Investors (AAII) sentiment survey was released, and again we see matching signals from March 2009. As Schaeffer's Senior Equity Analyst Joe Bell noted yesterday, the number of bulls on a 10-week moving average is flirting with levels that have marked huge buying opportunities going back the past decade -- including March 2009. (Click the chart below to enlarge).

Click to Enlarge

Now, I want to stress that these indicators alone aren't reason to buy -- we need to see continued improving price action. In fact, I'd love to see the SPX clear with some conviction that 1,333 area that has repeatedly been holding us back of late. But all in all, the stage could be set for a big summer rally if we can get any good news out of Europe, as sentiment is simply too over-the-top negative here.

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