Market Showed Strength

Arg. I have been fighting the market! Not a good strategy. More about this later.

The PMO is at the top of its range so you have to be looking for signs of the next short-term downtrend (or consolidation). Early in the week, there were a few indications of market weakness, but on Friday the short-term uptrend took control again.

With the market showing so much strength on Friday it is tempting to jump in, but this strategy of lightening up at the top of the PMO range, and re-deploying at the bottom of the PMO range works really well over the long-term for me.

So, I am sticking with my indicators and using this rally to raise cash. When I make a mistake and start to raise cash a bit too early, I just have to suck it up and do better next time.

The put/call is near the bottom of its range which corresponds well with the PMO indicator which is at the top of its range. The put/call doesn't appear to have reached its lows quite yet. We should start to see some white candles when it does.

The VIX is still just a bit elevated. I am no VIX expert, but I do think that very low levels of the VIX confirm the longer-term bullish trend even though it might also point to a short-term overbought condition. The VIX can't quite make it back to its lows which I think is a bit bearish longer-term, but maybe this isn't the most important thing to be concentrating on at the moment.

I mentioned earlier that there were some indications of market weakness. You can see this in the bullish percents which started to look like they were pointing lower Tuesday and Wednesday. But on Friday they turned back upward convincingly.

I notice that the SPX bullish percent didn't drop much Tuesday and Wednesday. Maybe that is a lesson that all three need to start to drop before there is a reliable change in trend.

The very sensitive Package Index has shown surprising strength, and on Friday it broke above the top of a bullish looking base. I think this group is very sensitive to rates. If this were a stock, I'd be a buyer. Strength in this group has to be interpreted favorably for the overall market.

Here is the chart that I rely on so heavily. The chart shows that there have been too many new 52-week lows in June. As often mentioned by Mike Burk (link here), a reliable rally of stock prices is confirmed by a harmless level of new 52-week lows. But in June the indexes rallied very nicely while there were also too many new lows. What happened?

It is tempting to say that this indicator has been undermined by the comments by the Fed Chair about rates, and the ongoing news about the trade conflict with China. But I just don't believe it. Something else is going on and my suspicion is that these new 52-week lows reveal a crumbling of the market foundation that is occurring even though the major indexes are pointing towards new highs.

Okay, this is just me voicing an opinion, but I think the major institutional stocks that control the indexes are responding to the news, and the greater majority of stocks are under the control of the forces that inevitably bring an economic cycle to an end.

The level of stocks above their 200-day would indicate that the best time to buy in the short-term has passed and that there will probably be better opportunities.

Jumping from the short-term to the long-term, this chart shows that the last three peaks in the stock market were accompanied by a change in direction for the 3M T-Bill rate.

The ECRI Index has continued to be weak, but not weak enough to indicate a bear market for stocks. When the ECRI is under zero, I expect the market to be choppy. When the ECRI is under -5, I expect stock prices to decline.

The bottom panel shows the rate-of-change in the money supply which has improved nicely. This is favorable for stock and gold prices.

The NASDAQ advance/decline line is showing a solid bearish divergence with prices.

However, the NYSE advance/decline is looking very bullish.

There is a lot of debate about the recently inverted yield curve. This debate is replayed during every cycle, but the most interesting comment I have heard is that the 2Y/10Y is not inverted and that this needs to occur before this begins to truly point to a recession.

The silver/gold ratio couldn't look weaker. This ratio is a good indicator of inflation and I would say this is pointing to a very low level of inflation.

More later if there is time.

Outlook Summary

The long-term outlook is cautious as of May-18. 

The medium-term trend is don't know. 

The short-term trend is up as of Jun-08.On watch for the next downtrend.

The medium-term trend for bond prices is up as of Nov-16 (prices higher yields lower).  

Investing Themes:

Treasuries, Cash

Strategy During a Bull Market:

• Buy large-cap stocks and ETFs at the lows of the medium or short-term market trends.
• Buy small-cap growth stocks on breaks to new highs in the early stages of market trends.
• Reduce buying when the market trend is at the top of the range.
• Take partial profits when the market uptrend starts to struggle at the highs.
• The cardinal rule is never invest based on personal politics. The stock market can do well regardless of which political party is in control.