Over the last couple of weeks, I have discussed the markets entrance into the “Seasonally Strong” period of the year and the “Return Of The Bulls.” 

The rally, driven by the highest level of short interest  since 2008, has once again ignited“bullish optimism.” As shown in the chart below, the number of stocks on “bullish buy signals” has exploded in recent weeks.”

“While the “bulls” are quick to point out the current rebound much resembles that of 2011, I have made notes of the differences between 2011 and 2008. The reality is the current market set up is more closely aligned with the early stages of a bear market reversal.”

It is the last point that I want to follow up with this week. 

There is little argument that the bulls are clearly in charge of the market currently as the rally from the lows has been “breath taking.” However, while the recent correction was indeed deep enough to reset the markets for a year-end rally, one question remains:

“How much room does this bull have left to run?”

Warning Signs Everywhere

Many have pointed to the recent correction as a repeat of the 2011 “debt ceiling default”crisis. Of course, the real issue in 2011 was the economic impact of the Japanese tsunami/earthquake/meltdown trifecta, combined with the absence of liquidity support following the end of QE-2, which led to a sharp drop in economic activity. While many might suggest that the current environment is similar, there is a marked difference. 

The fall/winter of 2011 was fueled by comments, and actions, of accommodative policies by the Federal Reserve as they instituted “operation twist” and a continuation of the “zero interest rate policy” (ZIRP). Furthermore, the economy was boosted in the third and fourth quarters of 2011 as oil prices fell, Japan manufacturing came back on-line to fill the void of pent-up demand for inventory restocking and the warmest winter in 65-years which gave a boost to consumers wallets and allowed for higher rates of production.