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A new short-term downtrend began on Thursday, Feb. 9. A number of the indicators that I follow are just beginning to roll over, indicating a new downtrend. However, based on Friday's market session, there are still traders willing to step in and buy as prices pull back.

The major indexes all closed under their five-day averages, although the Dow has actually been moving sideways for several weeks. So far, this pullback in prices looks like an ordinary period of rest for the market. Let's watch to see if the selling accelerates lower, or if prices just temporarily settle down slowly into a lower range.

The bullish percents are pointing decisively lower and are confirming the new downtrend. At the moment, based on the strength in market prices so far this year, it seems unlikely to me that these indicators will reach all the way down to their December lows.

The NYSE Common-Stock Only Summation has peaked and is also pointing decisively lower. This indicator has been working quite well as a signal for the short-term uptrends and downtrends of prices in the general market. In other words, the indicator reveals the short-term market cycle. Looking back over the six months shown in the chart, there were only a couple tiny false signals seen in September and October.

The chart below has been my star player since early 2022. The general rule is to invest in stocks following the trend in the prices of junk bonds. Lower junk bond prices indicates risk-off sentiment which is a signal to sell stocks, particularly the stocks that have run up too far and too fast.

As of Friday, the junk bond ETF has broken down below support and is pointing lower, and, as a result, I think it is worthwhile to take note that it confirms the short-term downtrend. However, there is still plenty of room for junk bond prices to move lower before we get overly alarmed.

The NYSE 52-week lows are at harmless levels, but the Nasdaq new lows have perked up a bit. Just like the junk bond chart above, don't make too much of it just yet, particularly because the new lows are coming from the Nasdaq rather than the NYSE. But you may want to watch this chart daily. 

When you see a lot of new lows while the PMO index is at the top its range, it is a general market danger signal. However, with the PMO currently near the top of its range but with the NYSE new lows at only 15 on Friday, there isn't too much to worry about regarding the general market at the moment. This means that this new short-term downtrend will probably prove to be a buying opportunity.

In a couple of weeks, when the PMO is at the bottom of the range, and NYSE new lows start to perk up, that will probably be a sign that the short-term trend is getting close to being oversold, and therefore become an opportunity to start looking at deploying cash in anticipation of the next short-term uptrend.

For months, I've been saying energy stocks are ready to roll over. Now, the energy ETF is looking quite bullish and if this were a stock, I'd be a buyer. However, I still don't like the energy stocks because the price of oil has been trending lower which I would expect would pull the stock prices lower, too.

Bottom Line

Similar to most people who follow the market, I'm skeptical towards stock prices because of the inverted yield curve, the weak leading economic indicators, and the history of treacherous bear markets that lure traders in with strong price rallies that then abruptly reverse lower and cruelly take away a trader's money.

However, there is no denying that so far in 2023, the market has looked a lot healthier than 2022, and there is a real possibility that the best strategy for making money is by being long stocks.

At the moment, I am about 25% long in the stocks with the best combination of fundamentals and bullish chart patterns. I am about 45% short via leveraged inverse ETFs, and about 30% cash. I doubt I will add to the short positions unless the market indicators start to seriously deteriorate, and I will add to stocks very selectively if both price and relative strength break above resistance levels.

Here is another look at the junk bond ETF. In the daily chart shown earlier, the rally off the October low looked more promising. In this weekly chart, that same rally looks more like a rally up to and failure at major resistance. 

The Nasdaq has also rallied up to and failed at resistance. If we are to believe that a new bull has begun, then this index needs to trade above this resistance level. But let's not get too negative either, as you would expect an index that has rallied up to resistance to chop and struggle for a period of time before it is able to break out above.

Another rally up to resistance can be seen, although the index hasn't yet been turned back. It also looks like a much more formidable level to get through than the Nasdaq resistance level.

The weekly small-cap chart also shows a formidable resistance level similar to the NYSE, but the index looks like it has been rejected at this level similar to the Nasdaq.

All four of these weekly charts show indexes that have rallied up to resistance but have been unable to break out above. Of course, they need to be given more time to prove themselves, but until the indexes can break out and trade above, I think we can remain market skeptics. I am a bear.

Outlook Summary

• The short-term trend is down for stock prices as of Feb. 9.
• The economy is at risk of recession as of March 2022.
• The medium-term trend is uncertain for Treasury bond prices as of Feb. 4.

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