Stock Market Outlook: 5 Charts That Show Fresh Bull Market Is Coming

The VIX, the stock market’s volatility gauge, appears to have peaked at around 31 last week. When the gauge spikes, that has historically been a good sign that stocks are nearing a bottom, Paulsen said.

When the volatility index has traded around the level 30 in the past, that has also been associated with “several historical great buying opportunities” in the market, he added.

“Sure, volatility could still rise further, but already this market signal suggests the current level of volatility is close to where several past ‘bull markets ’emerged,'” he wrote. “Today, the level of volatility argues complacency has evaporated, which is often when bulls awaken.”

The market has plenty of cash sitting on the sidelines that could potentially fuel a future bull run, Paulsen suggested. Total money market assets decreased slightly to $7.8 trillion in the last week, but remain near record highs, according to data from the Investment Company Institute.

Paulsen said that the “liquidity spike” in money market funds looked similar to the increase prior to the start of the 1992, 2002, 2009, and 2020 bull markets.

“Bulls love untapped buying power and excessive dry powder often keeps the bear quiet!” he added.

Investors are buying more puts — which offer downside protection if the market goes down — as opposed to calls, which benefit when the market goes up. Still, the ratio of puts to calls in the market has fallen to levels that have preceded past bull rallies, Paulsen noted.

“Today’s put/call ratio is at or below a level which marked the start great upward stock market moves during the last 20 years. Bulls love to make investor insurance (puts) worthless, and Bears often need more calls before they can bite,” he said.

When the ratio of consumer debt relative to income sees a sharp drop, that has historically been a bullish signal for stocks, Paulsen said, citing his analysis of the S&P 500 and the ratio over the last 60 years.

Barring the pandemic, the ratio of consumer debt-to-income is currently hovering around a 25-year low, and looks poised for a “recovery which should also fuel the stock market,” he added.

“Since 1960, when the consumer credit to income ratio begins rising, Bulls control the stock market!” he said.

While rising unemployment is generally thought to be a negative for stocks and the economy, past multi-year unemployment spikes have actually been associated with periods of strong market growth, Paulsen said.

The 3-year growth in the US jobless rate is currently hovering near levels that preceded the stock rallies during the pandemic, following the Great Financial Crisis, and in the early 2000s, Paulsen noted.

“As demonstrated, during the post-war era, a rise in the unemployment rate by 25% during any three-year period has often proved BULLISH for the stock market!” he wrote.