4 bullish signals are pointing to more stock gains ahead, according to Bank of America

• The stock market rally is likely to continue, says BofA technical analyst Stephen Suttmeier.
• Suttmeier highlighted four positive signals that suggest a healthy bull market in a note on Tuesday.
• "Rotation, which is the lifeblood of a bull market, suggest that the SPX hit last week's highs from a position of strength," Suttmeier said.

As the stock market hits a series of record highs in 2024, there are positive signals suggesting the rally can keep going.

In a Tuesday note, Bank of America technical analyst Stephen Suttmeier said the ongoing bull market is in good health amid a broad rotation into shares of smaller companies.

"A broadening of the rally as well as rotation, which is the lifeblood of a bull market, suggest that the SPX hit last week's highs from a position of strength, not weakness," Suttmeier said of the S&P 500.

Suttmeier said solid seasonals toward the end of an election year, combined with strong technical factors, could help fuel the stock market to record highs later this year.

These are the four bullish indicators that give Suttmeier confidence in a continued market rally.

1. Junk bond spreads are narrow

The difference in yields on risky corporate debt and ultra-safe Treasury debt is showing no sign of concern for the broader stock market.

When investors get worried about the economy and the broader market, they usually demand a higher yield for risky junk bonds relative to risk-free Treasurys, sending credit spreads soaring.

"This credit spread remains narrow, which is a positive sign," Suttmeier said.

2. Corporate bond spreads are tight

Similar to the signal coming from junk bonds, the chart below measures the difference in yields between higher-quality corporate debt and the 10-year US Treasury note.

"The BAA spread remains benign (aka risk-on) below 2.0," Suttmeier said.

The spread hit 1.38 in April, representing its lowest level since 1995. It currently stands at about 1.58, well below the 2.0 level that Suttmeier says represents a "risk-on" environment for stocks.

3. $6 trillion in cash is a bullish signal

Investors holding a record $6 trillion into money market funds is a contrarian bullish signal, according to BofA.

That money could serve as fuel for a continued stock market rally, especially if the Federal Reserve cuts interest rates, making the current 5% cash yield less attractive.

Such a scenario would likely lead investors to evaluate their cash position, and ultimately consider buying stocks.

4. Fed financial conditions confirm the rally

New highs in the stock market over the past few weeks have been confirmed by new cyclical bull market highs for the Chicago Fed National Financial Conditions Index, according to Suttmeier.

That's a healthy signal that should support sustainable gains in the market.

The financial conditions index last sparked a major negative divergence towards the end of 2021, when the S&P 500 was rising even as the financial conditions index was declining.

With the financial conditions index recently hitting its highest level since early 2022, it still has room to run to eclipse its 2021 peak, suggesting there's more room for upside for the stock market.