Stocks: The Short-Term Trend

I think we have a new short-term uptrend, although it seems fairly weak. 

The SPX equal-weight closed above the 5-day, and the number of new 52-week lows dropped way down into the harmless range. 

It is a qualified uptrend, though, because it is probably within a sideways range meaning that the uptrend will soon find resistance at the top of the range.

Because I am not expecting much from this uptrend, I probably won't make any changes to my accounts.

(Click on image to enlarge)

Sentiment

The Investor's Intelligence Newsletter Writers Sentiment Survey came in at about 49% bulls this week, down from about 55%. From a contrarian point-of-view, this is a nice improvement but it is still a bit bullish, and isn't yet presenting us with the wash out in bullishness that comes with a significant market correction.

The chart below shows a momentum indicator of the inverted 10-day put/call ratio (to create a call/put ratio), and it overlays the SPX. This chart shows that, on a short-term basis, we are in a buy range for stocks.

(Click on image to enlarge)

Outlook Summary:

I am expecting a choppy, headline-driven, sideways market between now and the November elections. I still plan to buy the dips for short-term gain, but over time I plan to continue to reduce my overall exposure to stocks.

The expected US economic growth rate is back down to the 2% level.

Higher rates are now a headwind for US stocks. The recent tax cut, the 300 billion spending increase, and the already out-of-control federal deficit are a set up for a very dangerous spike in interest rates.

Once again, the problems in Europe related to debt and the banking system are serious issues.

Something else to consider is the Mueller investigation. I worry that the headlines generated by the investigation may rattle the markets more than people are currently anticipating. 

Based on market seasonality, Mike Burk is projecting a medium-term stock market peak in May which sounds about right to me.

• The long-term outlook is increasingly cautious.
• The medium-term trend is down.
• The short-term trend is down. 
• The medium-term trend for bonds is up.

Outlook from Bob Doll, Nuveen  (Bob Doll)

• Stocks are in a sideways holding pattern
• Rising rates and protectionism are headwinds
• Low risk of recession or bear market this year
• White House and mid-term elections present political risks
• 2018 could be mirror image of 2016

Investing Themes:

• Technology
• Banks and Brokers
• Payment Processors
• Gamers
• Defense
• Emerging Markets

Strategy:

My accounts are now about 60% stocks. The remainder is cash and bond funds. New purchases are on hold at least until the short-term trend corrects down to the bottom of its range.

Buy large cap stocks and ETFs on pullbacks of the medium-term trend.

Buy small cap growth stocks on break outs to new highs during short-term up trends.

Stop buying when the short-term trend is at the top of the range.

Take partial profits when the uptrend starts to struggle at the highs.

Never invest based on personal politics.