Why the bull might still have legs

Stocks have been stuck in a rut lately -- a deep and persistent one.

The Dow Jones industrials average is mired at levels it first reached back in November. The NYSE Composite, a broader and more representative index of the overall stock market, is at levels first hit back in June, mired in an epic, 11-month-long sideways trading range.

There's been plenty of excitement: From commodity and currency price volatility to the setting of incremental new highs for the major stock indexes. But overall, investors are seeing a lot of listless churning that stands in stark contrast to the easy, no-drama gains of 2013 and early 2014.

The good news is some evidence shows that we're on the cusp of a "risk-on meltup" rally of the type that markets throughout Asia and Europe have already seen this year.

Just take a look at the performances posted in these markets since November. The Shanghai Composite index is up some 58 percent. The German DAX is up more than 30 percent. And Japan's Nikkei is up more than 13 percent. Fueling these rallies are renewed hopes of monetary policy stimulus (in the case of China), the deliverance of long-promised cheap-money easing (in Europe) and the ongoing flow of cheap-money stimulus (in Japan).

The catalyst for a similar rally in the U.S. is growing evidence that inflation will remain below the Federal Reserve's target in the months to come as well as new data showing a slowdown in the pace of job creation. Both measures increase the odds that the Fed will be forced to delay its first interest rate hike since 2006 -- possibly as late as the beginning of 2016, according to Goldman Sachs economist Jan Hatzius.

The February inflation data contained in the personal income report released earlier this week showed that the deflator on core personal consumption expenditures (PCE), the Fed's preferred inflation measure, remains stuck at 1.5 percent, a half-percentage point below its 2 percent target.

The worry is that the drop in overall PCE inflation will have a dampening effect in coming months as the drop in energy prices trickles down into the prices of goods and services throughout the economy.

On Wednesday, the soft ADP private payroll report suggested U.S. job growth is slowing. The measure has fallen, on a month-over-month basis, for four consecutive months. March job gains totaled 189,000 vs. the consensus forecast of 225,000. That casts a pall over Friday's payroll report.

Also, overall stock market breadth is improving, setting up a short-term oversold bounce into the long Easter holiday weekend (stock markets will be closed tomorrow in observance of Good Friday). The NYSE had 204 net advancing issues on Wednesday -- a sign that despite the weak closing numbers, bargain hunters were on the prowl. Compare this to the nasty 2,250 net declining issue sell-off on March 6 as the Dow was falling away from its most recent record high.

With job growth apparently slowing and inflation still soft, the Fed has little reason to tighten monetary policy now. Especially with the Atlanta Fed's GDPNow real-time first-quarter GDP growth estimate falling to zero percent -- suggesting an outright stall in the economy (due, admittedly, to a harsh winter).

The chart above from RBS' Alberto Gallo shows how the futures market is increasingly pricing in no rate hike until January 2016, while the odds of a rate hike in June are decreasing. As this expectation of delayed Fed rate hike timing grows in size and visibility among investors, the odds will increase that stocks make fresh gains. The outlook for a continuation of ultra-cheap credit conditions -- which has fueled stock prices through things like portfolio reallocation effects and debt-fueled corporate buybacks -- could give Wall Street a lift.

Should payroll gains disappoint (or the unemployment rate inch higher) in Friday's jobs report, it'll be the green light stock bulls have been waiting for. While equity valuations remain a challenge, that doesn't mean stocks can't get even more expensive.