No Evidence Yet Of A Short-Term Downtrend

Last Saturday I wasn't sure if a new uptrend was developing, but now, looking back, it seems clear that a short-term uptrend started on Feb. 24. Even though Friday, March 4 was an awful day in the market and the major indexes all turned back at their larger downtrend lines, the evidence isn't in yet that the next short-term downtrend has started.

Below is a chart of the SPX with the PMO index in the panel below it. You can see that the current uptrend hasn't been much of a trend so far, but if you bought stocks that were breaking higher in the strongest sectors of the market, it was a very profitable few days. 

Looking at Jan. 24 and Feb. 24, there were some big intra-day key reversals that occurred while the PMO index was at its lows, which is a setup to cover shorts and go long (with courage).

I think this chart shows that tracking the short-term trends, although more difficult, is still really important for buying (or shorting) stocks at lower-risk entry points. I will also point out, though, that this chart makes it obvious that you can't sit back and wait for a comfortable confirmation of a short-term uptrend and expect it to last for a number of weeks. 

The first sign of a new short-term downtrend is to see the major indexes below their 5-day averages, and this occurred on Friday, although not decisively. If these indexes had closed at their lows, it would be much more meaningful.

The bullish percents ticked lower, although still above the 5-day averages. Similar to the chart above, they showed weakness, but not a meaningful change in direction.

This chart clearly shows the larger trend of the major indexes, which is downward, and that the indexes are close enough to the downtrend lines that a turn lower in the short-term trend is expected soon. However, the SPX is at important support, so even though I am doubtful, it is possible that the SPX is forming a bottom at this level. 

Everyone is well aware at this point that commodities prices have gone through the roof, but this rate of change is obviously unsustainable and shows a high level of emotion.

I think we can all agree that if this index continues to move higher, that it is a major headwind for the price of most stocks. But what happens when it finally reverses and pulls back? Will it mean that stock prices go higher again? Or will it mean stock prices continue lower because high commodity prices have caused demand to collapse in an abrupt slowdown of the world economy? 

We need to dust off our bear market playbook to remind ourselves that as a bear market starts, stock prices peak, and then commodity prices peak.

Here is a look at the US dollar, which is also surging as demand for the safety of US Treasuries has surged. There is lots of news about the collapse of the ruble, but not as much is being said about the weakness of all other currencies versus the dollar.

With the chart of the dollar looking like this, how can the Federal Reserve raise rates? The higher dollar will certainly help our inflation problem, but it will make inflation in other economies worse. 

If our Federal Reserve raises rates, we also run the risk of a flattened or inverted yield curve. The curve is already looking dangerously low. 

I listened to my usual CNBC podcasts this week and was really surprised by how optimistic the investors were. All the discussion was about what or when to buy. It makes me think that there is still too much optimism towards stock prices despite the sentiment surveys that point to high levels of caution.

One last comment. I am completely in agreement with sanctions and boycotts of Russia. But people seem to view the collapse of the ruble and the Russian default on their obligations as a clean surgical removal of Russia from the world economy. But I just can't imagine that it is that simple, and my guess is that banks and funds will be hurt very badly. The implications are very negative for stocks.

Bottom Line: I am short stocks via bear 3x funds at about 35% of my accounts. The rest is cash. Obviously, I'm fairly bearish towards stock prices at the moment, but I'm also staying open to the possibility that I am wrong, and I'm not going to fight the trend if prices break out of their downtrend.

Outlook Summary

• The short-term trend is up for stock prices as of Feb. 24.
• The economy is in expansion as of Sept. 19, 2020.
• The medium-term trend is down for treasury bond prices as of Jan. 3 (prices down, yields up).