Is There a Major Stock Market Rally Brewing?

James Kostohryz thinks so. And he is putting his money where his mouth is. His reasoning is very sound and is mostly based on overreaction by big investors and behavioral factors. His window of opportunity will be from March to June.

As most of you know, on March 2, on the Buzz & Banter, I announced that I was initiating a 50% long position in US equities (from 10%) with the S&P at roughly 700. On March 5, with the S&P at around 680, I implemented a 100% long position.

I've maintained this core position since then and have traded around it using leverage. Since then, I've reiterated various times that I believe that the market has put in an important intermediate term bottom, and that the market will experience a major countertrend rally.

Here are his tells to show you the rally is underway:

1. Oil, basic materials, industrials and transportation outperform due to a belief that the global contraction has bottomed out. Watch IYM which is trading at 36.17 for this tell. This one may have already been hit because IYM has outperformed the S&P500 in the last few months.

2. Corporate Debt Spread Contract as TALF, TARP, toxic debt triage plan etc. starts to help credit markets. The tells here are LQD which is trading at $93.10, CFT at $90.64, JNK at $29.30 , and HYG at $69.30. All of these ETFs have been recovering nicely from their lows and are a few points higher.

3. Emerging Markets Outperform. The tell here is EEM which has gone from 19 to 26 since March 2nd.

4. VIX goes below 40 and stays there. This one is pretty close because the VIX is at 42.93.

5. Rising Put/Call Ratios. This is the wall of worry the market needs to climb to go higher.

6. Export Data from Japan and Asia get better. Japanese Imports and Exports are dropping like a rock but they are now carrying an unexpected trade surplus of Y82.4 billion. Chinese exports are in the dumper as well, going down 25.7% from a year earlier. These numbers seem to be near rock bottom so hopefully they won't get much worse. March will tell the tale.

7. Job losses begin to slow down or even stop. I think this will probably be one of those things where economists call for a big drop and instead there is little to no drop and everyone is surprised. Then Obama will say that the stimulus is working.

8. Commodities prices start to stabilize with oil at $55-$60. Two tells here (that are fairly liquid) are GSG and DJP. Both of these are commodities Index ETFs.

9. "Disappointing" pre-announced earnings that don't tank the stocks. Look for signs of stabilization in earnings as companies forecast the rest of the year.

10. Shrill bears calling it a "sucker's rally" etc. This is a contrarian indicator that tells you that the louder and more dogmatically they complain the higher the wall of worry becomes. Then if you see them switch sides you know the rally is underway.