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Ritholtz: Ten Bullish Charts, Signals and Indicators

Editor's note: This was originally published on RealMoney. It is being republished as a bonus for readers.

This is an expanded version of a research commentary sent to institutional and managed asset clients of FusionIQ on Friday, Oct. 10 at 1:00 p.m.

For the past couple of years, I have been rather negative on the economy, on the housing market and on the stock market. Recall our " Cult of the Bear " article from January 2006 lead out the many potential dangers the economy was facing. With the Dow now under 8000 and the S&P below 850, it is time to put that perspective away, and begin to prepare for the eventual rebound.

A few caveats are in order before we begin. First, bottoms are a long process. Given the extent of the credit crisis, and the depth of the current recession, we are looking not for a "V" bottom, but for a gradual improvement in equities from the deeply oversold levels.

Second, we believe in slowly deploying capital rather than trying to "guess" at a bottom. Third, we believe that patience is a virtue, and anyone making the purchase this day, week or month is doing so with a six- to 18-month window and not a tick bite to return.

Regardless, we see many signs that suggest a reasonable upside move is an increasingly high probability. What brings us to this conclusion? It isn't the economy. And the credit situation is even worse than it was a week ago. Rather, with rampant fear and prices now off more than 40% from their year ago highs, we like the odds of a 15%-25% rally sometime in the immediate future.

Note that this is not based on a gut feel, hunch or instinct but on several of our favorite quantitative indicators that track when markets reach absurd extremes. This appears to be one of those times. What follows are 10 factors that suggest to us an upside trade is more attractive from these levels.

1. Relative Strength Indicator, SPX, 1928-2008

Since the S&P 500 was formed in 1928, its monthly relative-strength indicator has dropped below 30 on just four occasions: the 1929 lows, the 1973 lows, the 2002 lows and this week. We like those odds as entry points for long positions.

S&P 500 Relative Strength, 1929-2008
Click here for larger image.
Source: Bloomberg

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