I am undeniably bullish right now. My only question at this point is whether this is a very significant bear market rally or the early legs of a new bull market. Believe it or not, I think it's the latter. As pointed out in my last article, this rally is being fueled by two very influential groups - financials and semiconductors. Wide participation in any short-term rally is necessary to justify any bull market call. We are definitely seeing wide participation on this rally. Breadth has routinely been 3 to 1 or 4 to 1 in favor of advancers on the NYSE and NASDAQ, and at times has grown to a 10 to 1 thrashing of the bears and beyond. The S&P 500 followed the lead of the NASDAQ recently, soaring above its 50 day SMA on heavy volume, retracing to retest it on lighter volume, then surging to a new high. The summer of 2007 was the last time that the S&P 500 was able to perform like that. Look at the recent strength of the S&P 500 below:
The S&P 500's next price test comes in around 875. However, if the VIX breaks down below key support in the 36-37 range, I believe the S&P 500 is heading a lot higher than that. Take a look at the VIX chart below:
One word of caution: The bullishness of late may require a price to be paid during options expiration week. The number of call options bought in the last 4 weeks is absolutely staggering. So enjoy this week while it lasts because tons of in-the-money calls may force a sudden drop in the major indices as we approach options expiration.