Stocks have fallen to the most oversold levels since the end of the last bear-market in 2002! Last week we saw another sharp rally, but yesterday stocks gave up decent gains to close mixed…no real follow through to the upside. That’s been the pattern for several months now.

Stocks bend to the breaking point, but refuse to snap. Instead, global equity markets tread water for a while…maybe bounce a little bit, but then roll-over yet again. So is this more of the same? I don’t think so. In fact, I’m seeing some signs that indicate a very profitable trading rally may be close at hand. Here’s why: My own personal “canary in the coal mine” indicator is quietly outperforming the S&P 500. That’s a potential BUY signal.

Keep your Eye on the Lagging Sectors

When every bull market breaks down and rolls over into a growling bear, there’s usually one key sector that leads the way down. In the last bear market, technology led the way down - especially internet shares.

In this bear market, it was clearly the housing sector that stumbled first. In fact, the Philadelphia (PHLX) Housing Sector Index peaked way back in the summer of 2005 (see graph above) while the rest of the stock market was soaring.

By mid-2006, the PHLX Housing Index was already down 20% from its peak - in bear-market territory! Of course a year after that, MOST of the major market indexes - both in the U.S. and globally - were also in decline. Housing started it all.

Most people aren’t aware of this. But as you can see in the chart above, so far this year the PHLX Housing Index is actually UP about 7% while the S&P 500 is DOWN about 7%.

That’s a major divergence for the stock market’s most beaten-down sector. It tells me that perhaps the worst is over for the industry that started this bear market.

If investors are already looking ahead to a recovery in housing, it stands to reason that the same thing should begin happening with other sectors too. In fact, I’m closely watching the beleaguered financial sector right now, because it’s next on my list for a potential bottom formation.

Bottom line: I doubt that this bear market is over just yet. In fact, the probabilities still suggest lower-lows. However, I’m watching closely for more signs of a powerful bear-market rally. It could ignite shares at any time, and provide some great short-term trading opportunities using call options.

MIKE BURNICK, Senior Editor & Global Market Analyst

P.S. Last week, I sent out a signal to subscribers of my Market Shock Trader service, telling them to buy call options on a leading player in the home mortgage market. I see big upside potential in this trade over the next few months. To get all the details, and a risk-free trial, just click here.