Market Very Oversold

The market is currently so oversold and Friday's rally was so intense that the start of a short-term uptrend seems likely next week.

I'm reluctant to say that a rally has started until the SPX closes above its 5-day.

There were still way too many new 52-week lows on Friday. Even though I'm optimistic that a new rally will start soon, the number of new lows needs to drop way down before a rally can be considered a new short-term uptrend.

The bullish percents haven't started to tick higher. These need to tick up above their 5-day averages.

Longer-Term

Here is a nice chart from Arthur Hill. Based on the cumulative advance/declines, the small and mid-caps are clearly in correction territory, but the larger stocks still show a little strength.

It is a similar story based on the cumulative up/down volume.

The 3M/10Y ratio has gone haywire. I don't know what to think.

Quite a few people stated last week that a bear market has started. Some people even believe that the fall of 2018 was a bear, followed by a bull in 2019, and now another bear in 2020. But I'm not sure (not that it really matters).

It looks to me as though the 2018-2020 period is a topping price pattern that we are not used to seeing. I expected a rounded top that gave us plenty of time to react. Instead, we got a huge zig-zag that flipped from euphoria to fear, and then again euphoria to fear.

Rising stock prices have been building on strong, steady employment. So, everyone has eyes glued to employment numbers.

The SPX hasn't yet reached down to the lows of 2018. And now with the bullish percent at such an extreme low, the odds are that the SPX will bounce higher before it runs at the 2018 lows again.

Here is my guess. For the stock market, first, there is the current low created by the panic of being so mentally unprepared for such a scary event. Second, there is a bounce where the fear subsides as we start to get our heads around what is happening. Third, there is another sell-off, but less panicked, that re-tests the 2018 lows as the economic impact is felt of a global slow down.

After that, who knows?

If we break below the 2018 lows, then the next target is the 2016 lows, and that is about a 40-45% decline which seems about right after a really strong 10-year bull market.

I don't intend to get caught flat-footed. I will be selling into rallies and buying into declines. I'll occasionally hedge, but my primary defense is cash.

Someone on TV said that Semiconductors are the new rails which I think is an excellent comparison.

If you believe that we are in a gigantic secular bull market in which the current bear is just a correction, then you have to really like this 12-year monthly chart. Let's watch this index test its technical levels.

Someone else on TV mentioned that the economy was really strong when this virus hit, so he believes that there will be a strong recovery once the dust settles. Based on this ECRI index, I believe that too although I think there is probably more dust to settle than he believes there is.

Who cares what he believes or what I believe. It is okay to have beliefs and opinions, but for trading and investing, let's follow the best indicators and let them tell us what to do.

My go-to long-term indicator is the ECRI index, and it was headed decisively higher in January. But now it has dropped below the zero-level which confirms the expectation that the economy is getting hit by the impact of the virus. If the ECRI Index drops below the -5 level then we prepare for the possibility of a recession.

Outlook Summary

Looking for signs of the next short-term uptrend.

The long-term outlook is negative as of March 12
The short-term trend is down as of Feb. 21

Contrarian Sentiment favors higher prices as of Feb. 7
The medium-term trend for Treasury bonds is up as of Jan. 25 (prices higher, yields lower). 

Cash 95%, Equities 5%

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

Trader Discipline

• Never invest based on personal politics
• Take pride in sticking to the trading plan
• Don't give in to fear and greed
• Never get angry