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This market bear thinks stocks could make new high

Siegfried Layda | Photographer's Choice | Getty Images

Watching investors buy stocks on bad news has been enough to persuade reliably bearish Bob Janjuah to change his mind.

The Nomura analyst said that as long as the market holds its ground from the latest buying spree, being short doesn't make sense.

Specifically, he told clients in a note Tuesday to watch the 2,020 level on the S&P 500. As long as that holds, he thinks the market likely is going up and may even make a run at its historic high.

Weak economic data, ironically, forms the base for Janjuah's theory.

U.S. payrolls growth has slowed considerably in recent months, with September's 142,000 growth helping confirm that the economy is decelerating. Signs of deflation or at least disinflation have cropped up as well, and earnings season is off to an unspectacular start, with S&P Capital IQ on Tuesday projecting a profit decline of 5.1 percent for the S&P 500 in the third quarter.

Market participants, though, have been buying on the disappointment. The S&P 500 has jumped 5.8 percent in October after being down more than 6 percent for the year heading into the month.

The key, Januah said, is that markets now believe that central banks such as the U.S. Federal Reserve are going to keep policy loose for much longer than once expected.

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"The market ... now seems to agree with my long-standing concerns on global growth weakness, on the ongoing victory of disinflation/deflation over inflation, and on my long-held view that — globally — central bank policy will stay looser, and get looser," he wrote.

"In fact the markets are so in line with my views that the expected Pavlovian reaction — that weaker data will lead to central bank action (balance sheet expansion), thus driving risk-on positioning — has led to my equity stop-loss trigger being activated," he added.

Traders indeed are pricing in less than a 1-in-3 chance the Fed will raise rates this year, and the European Central Bank and Bank of Japan are unlikely to tighten, either. The reaction from the market, though, surprised Janjuah.

Read More Hedge funds see worst year since financial crisis

"I did not expect such a strong risk-on move in response to such bad data!" he wrote.

Tuesday afternoon the S&P was around 2,027. So long as the S&P 500 stays above 2,020, Janjuah said, "being positioned for risk-off no longer seems appropriate."

"Rather, I would not be surprised to see attempts to recapture the highs of the year over the next few months if the 2,020 level holds," in which case, he said, "it makes sense to further participate in this latest bout of Pavlovian antics."