That’s Right, It’s Time to Get Bullish

In complete contrast to last week�s 5.4% gain, this week�s 7.1% loss (so far) is tied for one of the biggest weekly losses in months. And the bearish riptide has whipped traders into a state of panic. After all, we�re teetering on the edge of new 52-week lows, and it seems as if the masses are certain it�s the beginning of a financial apocalypse.

Before selling all your stocks and sealing the hatch on your bunker though, you may want to stop, take a deep breath, and put this week�s pullback into perspective. The fact is, not only have we seen and survived dips of this magnitude before, we may have actually just seen a short-term bottom.

So Bad It�s Good

Most of the time, the market is quite nominal — average movement, average volume, and an average opinion about its future. Every once in a blue moon though, things go haywire and push stocks to their limit.

Thursday was one of those days. We saw things you may one see once every few weeks, if not every few months. Funny thing about these rare occurrences, though — all of them almost always materialize not at the beginning of pullbacks, but at the end of them.

Take the number of NYSE stocks hitting news lows as an example. On Thursday, 787 NYSE-listed stocks hit new 52-week lows. Normally, it�s closer to 50 NYSE equities hitting new lows on any given day. To see that many names do so poorly is a major hint of a bottom-making blowout.

And yes, there�s plenty of precedence for the idea, and we don�t even have to go that far back to find it. Remember Aug. 8 when the initial plunge of this rout finally found a floor? On that day, 1,306 NYSE stocks hit new 52-week lows � a clear statistical outlier number (see chart below). A week later, the S&P 500 had gained 7.5%.

Fine, but that was a fluke; there�s no way that �too many new lows� can signal a bottom — right?

Actually, there�s an amazing correlation between a surging number of new 52-week lows and major bottoms. We�ve seen the phenomenon several times in the meantime, but the number of stocks hitting new lows back in late 2008 and early 2009 marked a string of major short-term lows, and even flagged the pivot out of the bear market. On, Oct. 24, 2008, 853 news lows set up a 14% run; on Nov. 20, 2008 , 1,514 new lows came in front of a month-long 23% rally; and on March 6, 2009, 853 new lows from NYSE stocks ended up kick-starting a brand new bull market.

So yeah, this �blowout� number of new lows on Thursday could mean something bullish.

There were other clues, too. When we break down daily charts of the SPDR S&P 500 (NYSE:SPY) exchange-traded fund, the PowerShares QQQ (NASDAQ:QQQ), or even the SPDR Dow Jones Industrial Average (NYSE:DIA) ETF into intraday charts and study how volume changed over the course of the day, we come to the same conclusion in all three cases. Note how all the �up� bars are supported by higher volume, which swelled greatly near the close of the day. On the flipside, though deep in the red for the day, none of the intraday waves of selloffs were backed up with significant or growing volume.

And not that it�s the only remaining bullish clue from Thursday, but it�s curious how both the S&P 500 as well as the Dow simply had to brush prior lows before starting a recovery effort.

For the S&P 500, a brief move under the floor at 1121 did the trick.

For the Dow, it was a move just under the Aug 8 low of 10,605 that turned the tide. And, it only took the tiniest bump into new low territory to work; Thursday�s low was 10,597 — a mere eight points under the prior low.

The list could go on and: a 90/10 (bearish/bullish) day for the Nasdaq�s volume, a 50-day moving average of the Arms Index that�s the highest it�s been in over a year, a VIX that�s once again bumped into a proven ceiling, and several other obscure clues that rarely happen, but when they do it�s usually at a market bottom. The idea is clear enough already, though: There�s just not much (if any) gas left in the bear�s tank.

Is this a bulletproof market call? No, there�s no such thing. This much can be said of it though: Like now, the masses were sure back on Aug. 8 that the selloff at the time was just the beginning of the pain. Yet we haven�t been beneath that low since then. Most of the same clues discussed here were also seen then. That�s not likely to be a coincidence.