Leading The Market Higher

The market performed well this past week after a wobbly Monday, and the PMO index started to point upwards on Friday. Ordinarily, I would say that we have a new uptrend, but other indicators are making me suspicious of the rally. The irony here is that I have been whining for weeks about the PMO not setting up properly off the low of its range, and now here it is finally and I'm backing away from it.

The chart below is a look at the major indexes and their five-day averages. These indexes showed excellent upward advances Tuesday through Friday, with prices looking to be very strong into the close each day. There is certainly nothing to complain about in this chart.

However, look at this chart showing the number of new 52-week lows on Friday at dangerous levels.

Monday was a wash-out low for stock prices, and the spike in new lows followed by Tuesday's decline in new lows was actually an early but tentative bullish signal to start to redeploy trading cash back into stocks. And then on Wednesday, the harmless level of new lows appeared to be confirmation that the market had transitioned to a short-term uptrend.

But on Thursday, the number of new lows on the Nasdaq was a bit too high for the early days of an uptrend, which was a hint to remain a bit cautious, so I sold some stock by taking partial profits and trimming a few laggards. On Friday, new lows spiked to dangerous levels early in the trading day, and I can't be bullish towards stocks with new lows at dangerous levels, so I sold the remaining stocks in my trading account.

Other indicators aren't quite as bearish as the number of new lows, but they aren't confirming an uptrend either. This chart shows that the major indexes rallied nicely this past week, but the broad measure of market breadth shown in the NYSE summation hasn't yet confirmed the price advance. Although, to be fair, it does have the look of an indicator that could be bottoming out. 

The 10-day call/put indicator looked like it was going to advance higher with the general market, but it turned lower again on Friday, which is another non-confirmation.

As discussed last week, we've all seen plenty of examples in the past where the major indexes advanced but the broader market was weak; the generals leading the troops higher. And even though this is a warning sign for the market, the generals can continue to advance and eventually pull the troops higher with them.

So, I wouldn't be a market bear based on this alone. But when you have the number of new 52-week lows at dangerous levels, at that point I am cautious towards stocks, and as a result, my trading account is in cash.

Don't think that I'm not envious of people who made good money on Friday, as there were some very good breakouts that occurred just after I cashed out. Also, I do suffer from a bit of "FOMO" (fear of missing out) because the number of new lows can disappear very quickly, and if that happens, I will be in cash while stock prices are rising. So, I need to be ready to handle these negative emotions and remind myself that I'm sticking to a trading plan that has worked well for me over the years.

I've marked the short-term trend shown below as "uncertain" because the indexes are at new all-time highs and it would be silly to call this a downtrend, but I also don't want to call it an uptrend if the indicators are telling me to move to cash.

Outlook Summary

• The short-term trend is uncertain for stock prices.
• Contrarian sentiment is unfavorable for stock prices as of Nov. 14.
• The economy is in expansion as of Sept. 19.
• The medium-term trend is up for treasury bond prices as of June 11 (prices higher, rates lower).