A Period Of Melt-Up For Stock Prices

The Short-Term Trend

The short-term trend continues. Buyers keep coming into the market and pushing it higher despite overbought technicals and overly bullish sentiment. I'm not complaining, though, because strong bull markets are what we want as traders, even if it is a scary ride.

I raised some cash early in the week by trimming stocks, but then the remaining holdings continued to indicate buy signals, so some of the cash went back into those stocks. Also, the market participants continued to expand, bringing in even more of the "re-opening" stocks, so I felt compelled to purchase initial positions in a few of these new leaders, as well.

Did I do the right thing by redeploying some of the cash at the time when the breadth indicators say to reduce exposure? Of course, I don't know for sure, but I really don't like to fight the market, so I think my current cash level of about 20% is a reasonable compromise for now. If stock prices insist on going higher, as a trader, I have to ride higher along with them. But, if stocks start to swoon, I'll need to admit my mistake and quickly reduce exposure again.

Below is a look at the PMO index. It has been at the top of the range for a longer period than usual, which is a basic signal not to chase stocks and that I need to have some uninvested cash in my accounts.

As I mentioned, breadth indicators are overbought and bullish sentiment is way too high, and that has existed for several weeks -- I think everyone is aware of it now. However, the case for owning stocks is just too compelling, so stock prices just keep moving higher. So there is no point is showing these charts again.

Maybe our time is better spent looking at the bigger picture via the inter-market charts. For instance, the US Dollar made a major move lower this week, which sends a clear signal to traders that inflation-sensitive and rate-sensitive stocks should be in our accounts. A weak US Dollar often favors owning emerging market stocks.

Treasury Bond prices are heading lower, which means higher longer-term rates. This obviously favors owning stocks versus bonds. 

A weak dollar and weak Treasury prices often go hand in hand, and initially this can really help our stock portfolios. But be aware that if these charts are indicating inflation, and inflation rises too high and too quickly, it will be bad for both stocks and bonds.

The Long-Term Outlook

The ECRI index continues to point higher, indicating solid economic growth four to six months into the future.

Every time we get one of these megaphone inverted triangle patterns, it looks like the end of the world to me. But, in my experience, they generally result in higher prices.

I forget who it was that had me convinced that we should be looking at this geometric index instead of the SPX to measure the strength of the stock market. Currently? I don't think so. 

It did a very good job of warning about the peaks in the 1999-2000 period, the peak in 2007, and even the short-lived peak in 2015. Also, it did a really great job indicating that the lows were in for 1991, 2003, 2009, and 2016. But how about now? You missed much if you believed that 2018 was the top. I can't really explain it, but it is still very interesting to me. 

That is enough charts for today. We are probably witnessing a period of melt-up for stock prices, which, as we all know, can be very profitable, but also presents the possibility of considerable downside. So, I will try to participate and profit, but I'll be ready to go to cash when needed.

Outlook Summary

• The short-term trend is up for stock prices as of November 3.
• Contrarian sentiment is unfavorable for stock prices as of November 14.
• 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).