General Stock Market Commentary - Saturday, August 15

The Short-Term Trend

I am not showing the PMO index this week, as I don't think it is doing a good job of showing the short-term trend at the moment. Right now, I think this very basic stochastic of the SPX equal weight is doing a better job of showing the trend in the short-term. So, based on this chart, the market is in a short-term downtrend (or a period of general weakness or consolidation).

Below is a view of the same index and stochastic, but expanded from six months to a year. It shows that over the past year, there have been about 6-7 short-term buying opportunities, and I think you can say the same for most years.

I point this out as a reminder that every period of weakness is really an opportunity; something to be drawn towards, not away from. That is, it's an opportunity as long as I take some profits and raise some cash into the market's strength so that I have money to use during the inevitable period of weakness.

Another thing to note about this chart - the bear market of 2020 was well-contained within a normal cycle of short-term weakness. If you took away the top panel and just showed the stochastic, you would never know that there was a devastating bear market.

So, did we really have a bear market, or was it just a very serious pullback in prices? I am uncertain, but the lesson is that sell-offs need to be viewed as opportunities.

This one is a bit extreme, and there will someday be a sell-off again that just keeps going lower. But, you have to be ready to jump back into the market when the indicator turns higher, while also having an eye on stop levels so that losses are kept small. The alternative? Ride the market down with a buy and hold strategy, which just doesn't work for me because I would end up selling at the bottom.

These are the only short-term charts I am going to show at the moment. They tell me that I need some cash in my accounts to be used to buy when this stochastic is near the lows of its range. I may not deploy the cash at the exact bottom, but the risk is lower, and in general, the potential to profit is better than purchases made right now.

The Longer-Term Outlook

I'm only going to show this one chart regarding the longer-term outlook. The ECRI index has moved above the magic -5 level, where economic contraction becomes economic recovery. This means I can relax just a little and let some of my favorite winning stocks ride into new highs, rather than aggressively capturing profits.

Just a reminder; the election is around the corner, and the pre-election period has usually a headwind for the major indexes. 

Outlook Summary

• The medium-term trend is uncertain.  
• The short-term trend is down as of August 13.
• The economy is in recovery as of August 14.
• Contrarian Sentiment favor is uncertain.  
• The medium-term trend for Treasury bonds is up as of January 25 (prices higher, yields lower).