5 reasons global markets are likely to continue higher in the short term

The current sentiment backdrop for US & Global markets remains conducive to one in which equities are likely to continue higher and take out recent resistance.

Below are 5 important elements to consider – 

1. Short positioning.

The disappearance of short covering that began in March and a build in short interest since May has been a major reason stocks have struggled in recent months. An unwinding of the recently added short positions could be a major tailwind for equities in the weeks ahead. In fact, total short interest on components of the SPX is now just slightly below the total of October 2011, which preceded a 25% SPX rally into April on the heels of short covering (see chart immediately below)

2. Equity Only Put:Call ratio supportive.

This measure is now rolling over from extremely high levels, implying that the unwinding of extreme negative sentiment is underway. Rollovers in this ratio from high levels have historically been concurrent with strong market advances, as it implies pessimism has hit extremes and is now giving way to a more constructive view.

3. Investor equity holdings unusually low.

The most recent survey from the National Association of Active Investment Managers (NAAIM) indicates equity exposure among this group is below average for readings since 2007 and 2012. This lower-than-normal equity allocation among this group is a source of potential fuel for the market.

4. Professional sentiment still largely negative

The weekly Investors Intelligence (II) survey suggests financial advisors have been slow to acknowledge that the current rally from the early June lows has additional legs. For example, from mid-June to mid-July 2011, the SPX rallied 5.8%, and the bulls-minus-bears reading in this survey increased from 9.6% to 28.0%. During this year’s rally from the early June bottom, which is equivalent on a percentage basis, the bulls-minus-bears percentage has moved from 7.4% to only 14%.

5. Hedge funds underweight equities

Analysis of option activity on major exchange-traded funds is showing relatively low hedging activity, suggesting hedge funds are carrying low relative equity exposure. This segment of the market is known for quickly going “risk on” and “risk off.” With the “risk on” trade a growing possibility, these players have the ability to support a rally over the next several weeks.