A New Short-Term Uptrend

The Short-Term Trend

A new short-term uptrend started early in the week. The PMO was a bit late as it ticked higher, but this is probably because the PMO often needs to spend a bit more time at its low range before it signals a change in trend.

As a rule, I believe a new uptrend only occurs when the SPX closes above its five-day average, which happened on Tuesday, November 3 along with a break above the 3340-resistance level.

The strong moves in price and volume display brutal volatility over the past two weeks. This is another very good reminder to me of how important it is to be raising cash at the top of the PMO range, so that I don't panic and sell near the bottom of the range.

The 10-day call/put ratio has started to move higher off a short-term low, which helps confirm the new trend -- not that confirmation was really needed for this new trend considering how powerful the rally was this past week.

The US Dollar is moving lower, which, at the moment, I believe is a risk-on signal suggesting higher stock prices.

The behavior of the markets was a bit confusing early in the week, with stocks in a strong rally as the 10-year yield broke higher before plunging. But by the end of the week, yields stabilized and the 10-year yield looks like it will continue to respect a short-term uptrend and is build a bullish base. 

Higher yields put downward pressure on high-PE stocks, but you would never know that based on the huge moves that tech stocks made last week. For now, I think higher yields mean that the stock market will broaden out to include industrials, financials, and materials. It might take a while for yields to exert downward pressure on high-PE stocks.

Following up on last week's comments about my goal to add more discipline to my trading -- when the trend looked to be moving higher early in the week, I quickly deployed cash back into stocks. Now I sit and watch for individual opportunities while keeping an eye on the strength of the market. The market usually gives you at least a few weeks of strength before needing to trim some stocks in order to lock in profits. 

My guess is that next week will be favorable for stocks. But after that, there may be some people who start to raise cash leading into Thanksgiving. Another thing to watch for is sector rotation. This past week seemed to be mostly about strong tech stocks, but next week there may be evidence of strength emerging in other areas, too.

Long-Term Outlook

The M2 money supply continues to expand nicely, which favors higher stock prices.

The ECRI index continues to point towards a stronger economy, which means higher stock prices for the longer-term. 

I was listening to CNBC this week and there were a couple of money managers who were very pessimistic about the economy due to the effects of COVID-19. I personally think that following an indicator like the ECRI does a much better job of assessing future economic growth than listening to our own fears and expectations based on the news.

The major indexes have been base-building with the potential to break out nicely during this seasonally favorable time of year for stocks.

Copper prices are rising, which is usually a good sign for the world economy, but also supports the view that there are early signs of inflation. 

This chart is a reminder to myself that no matter how high stock prices are, they can always go higher (I am a chart-reading pessimist and I have to push myself to see the upside potential).

Treasury prices are under pressure (yields higher), but based on this chart, it is too early to say that the longer-term trend is lower.

The Newsletter sentiment poll has moved the number of bulls back into a favorable range for higher stock prices.

Outlook Summary

• The short-term trend is up for stock prices as of November 3.
• Contrarian sentiment is favorable for stock prices as of November 4.   
• The economy is in expansion as of September 19.
• The medium-term trend for treasury bonds is down as of October 10 (prices lower, yields higher).