Respect The Risk In The Market

 

The indexes look a lot happier than the PMO index. They have continued to inch higher while hugging their five-day averages. This chart shows a very nice looking, steady uptrend.

Here is a look at the general market's daily PMO. No sign yet of weakness.

The 10-day call/put turned lower this week. This index often (but not always) changes trend before the indexes, so I pay close attention to it. This chart tells me that there is a good chance that the general market will soon start to move lower and that now is a good time to prepare for it.

The SPX bullish percent is well into the "raise cash" range. It doesn't mean sell everything, but it does mean that it is time to respect the risk that the market might move lower. My strategy is to refrain from buying new positions and to start to trim existing positions starting with the under-performers and the extended stocks. Also, we are well past the point where I would be off margin.

This is the most important chart in my opinion. I don't like to see a lot of new 52-week lows while the market is rallying. It isn't a good sign. It means that the market internals aren't as positive as the rising indexes would lead you to believe. 

I think this chart indicates that the market is in one of its common patterns where the generals are marching higher but the troops are reluctant to follow. We've all seen this so many times, but just not recently. 

Bottom line, when I see an excessive number of new 52-week lows with the PMO rising, I get cautious towards the market and raise more cash than I would have otherwise.

Regarding market sentiment, there are way too many bulls. Any number over 60% means it is time to be taking profits. From a contrarian point of view, sentiment is working against stock prices.

For me, this year is about protecting gains and respecting risk. It means buying into the market dips rather than the breakouts and stopping out of positions to keep losses to a minimum.

Outlook Summary

 

The short-term trend is up for stock prices as of March 25.

Contrarian sentiment is unfavorable for stock prices as of Nov. 14.

The economy is in expansion as of Sept. 19.

The medium-term trend for treasury bonds is down as of Oct. 10 (prices lower, yields higher). 

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