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Hated market comeback may have further to go

Traders work on the floor of the New York Stock Exchange.
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Traders work on the floor of the New York Stock Exchange.

This year oil is up, high yield bonds are coming back, the U.S. dollar is down and the Federal Reserve is dovish again. Investors are betting against stocks more than they have in six years. So why do they hate stocks so much?

As these skeptics are forced to cover their short positions, it may add fuel to the six-week run that's lifted the S&P 500 into positive territory for 2016, according to a Wall Street strategist.

"If U.S. dollar strength and falling commodity prices were major headwinds to sentiment and earnings per share in 2015, shouldn't the unwinding of these trades serve as a tailwind in 2016?" Fundstrat's Thomas Lee wrote in a note to clients Friday.

He added, "Hence, given the positive turn in risky assets year to date, we see a catch-up trade for stocks."

The strategist stated that the Fed's dovish statement on Wednesday brought down expectations of an aggressive hike cycle. And as the employment data improves, Lee expects domestic inflation to "outpace Europe and Japan," which will result in a further move lower for the dollar.

A weakening dollar is bullish for the market as 33 percent of S&P 500 companies' sales are international. Each 1 percent move lower in the dollar adds $30 billion in sales, according to Fundstrat analysis.

Short interest is the highest since 2009, according to Fundstrat. The shop found that, historically, when short interest increases by 10 basis points and credit eases by 30 basis points, the S&P 500 rallied six months later eight out of nine instances since 1996, with a median return of 12 percent.

Here are 10 highly shorted stocks with rising bond prices Fundstrat recommends to take advantage of this comeback opportunity.

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