The short-term uptrend continues and it has been a healthy one, with the PMO index reaching all the way to the top of its range for the first time since early in the year. However, with the PMO at its maximum, it is time to be looking for opportunities to trim laggards, focus on the leaders, and raise a bit of cash in order to get ready for the next short-term buying opportunity.

The SPX and Dow are still above their 5-day averages, and this chart shows serious market strength for the past six to seven days, with the indexes consistently closing at their session highs each day. This is very bullish behavior, but the NDX, after a very strong session on Thursday, reversed its trend and closed below its 5-day on Friday, which is probably a caution signal that the momentum that carried the market higher is weakening a bit.

Looking back at September, the market chopped lower on high volume, and it makes sense now to see it hesitate just a bit after it so quickly erased the entire September decline. Also, volume has been a bit disappointing during the October rally.

The Nasdaq posted a distributed day on Friday and it has been the weaker index by far, as we'll see in the charts that follow.  

The NYSE bullish percent shows a nice uptrend, strong participation, and strong closes that are well above the 5-day average. This is very bullish-looking behavior, and an optimist would note that it has plenty of room above to run higher still.

The Nasdaq bullish percent isn't as strong, and the weaker participation suggests that Nasdaq stocks are being pulled higher by the strength of the better quality NYSE stocks. This is a good chart to watch for signs of a top in the short-term trend. A close under the 5-day for either index would be a signal to raise some cash.

The inverted VIX may have peaked. I don't think it is a sign to sell stocks, but it definitely reinforces the idea that now is the time to be more focused on taking partial profits rather than adding new positions. I'm liking this indicator because its stochastic moves so clearly between the highs and lows of its range.

The 10-day Call/Put (inverted Put/Call) is also looking very strong, but near its previous peak. There is no sign of weakness in this 10-day chart, but the daily Call/Put (not shown) peaked on Wednesday so we might see a pink or red candle show up here soon.

More of the same -- the SPX equal-weight momentum indicator looks ready to peak after the index has made a very strong move into new highs. Nothing to complain about here, except that the market may be ready for profit-taking.

This small-cap index showed a little strength this past week, but junk bonds did not and small-caps are likely to follow the direction of the bonds eventually. I don't like the idea of buying stocks while junk bonds are trending lower. This is a caution flag beyond just the short-term.

Nasdaq new lows refuse to behave. These new lows correspond with the Nasdaq underperformance, the small-cap underperformance, and the junk bond weakness shown in the charts above.

I definitely don't like a market with an elevated number of new lows, and with the PMO at the top of the range, an elevated number of new lows is more dangerous. But, we've all seen plenty of markets where the large-caps push the market higher while the small-caps were left behind, so for now we will focus on participating in the market gains but keep our eyes wide open to this caution signal.

This chart really gives emphasis to the bearish look of the Nasdaq, as if we needed another reminder of the Nasdaq and small-cap weakness. Enough said.

This is one of my favorite charts. It is a reminder that when the PMO is at the top of the range, it is time to limit new purchases and focus on raising cash. I raise cash partly to limit the drawdown, but more importantly to have cash available for the next, inevitable short-term buying opportunity. 

My cash level is currently 25%. That's a bit high considering that the PMO is still at its peak, and this might indicate that my level of caution is a bit too influenced by my emotions.

Yields aren't being discussed as much lately because everyone is sick of talking about them. But they are still the center of the market and influence all other prices. Note that the 30-year yield peaked in mid-October. Is it just a blip or is it something substantial?

If the 30-year starts to head lower, then I believe the 10-year will follow or level out, and that will probably, at least for now, be good for stock prices. It indicates a slower economy and maybe indicates that the rise in commodity prices will pause, which means there is less pressure on the Fed to raise rates, and so on.

From a contrarian point-of-view, bulls at 43% is good news and favors higher stock prices. Combine this survey with the favorable time of year for stocks, and you have a very good back drop for rising stock prices medium-term.

There is so much discussion nowadays about the seasonality of stocks that I thought it might diminish the seasonality impact, but September certainly lived up to its poor reputation. Now, the best few weeks of the year begins and I've spent the morning making the case for short-term caution -- although I do think I'm leaning a bit too cautious with 25% cash. You'll have decide for yourself.

Bottom line: Large-caps are strong, small-caps are weak. Seasonality and sentiment favor stock prices, but the short-term trend might be ready for a pause.

Outlook Summary

• The short-term trend is up for stock prices as of Oct. 8. 
• The economy is in expansion as of Sept. 19, 2020.
• The medium-term trend is down for treasury bond prices as of Sept. 23 (prices down, yields up).