The short-term uptrend continues, but now it seems like a price pullback is a bit overdue. The market looked like it was starting to roll over this past week, but the weakness never showed up in this chart of the PMO. But we'll probably see a big red candle appear soon, and that will be the start of the next short-term downtrend.

This chart shows the week's action. The major indexes pulled back a bit mid-week, but they didn't break down, and then on Friday, they rallied with strong closes. There is obviously a lot of buying pressure left in this market and it won't go down easily, but at some point soon the buyers will be too exhausted to fight and the sellers will take control.

The 10-Day Call/Put ratio is now pointing lower after a solid rally starting mid-October. This chart is certainly looking short-term bearish and it is the kind of hint about the market trend that I like to look for in the charts.

Keep in mind, though, a short-term "downtrend" doesn't necessarily mean severe selling of the major indexes like this past September. The majors could still advance, but the broader market is likely to be choppy, and a number of stocks will pull back on profit-taking and sector rotation.

I have been focused on the price of junk bonds for a couple months. I was worried when they didn't rally with stocks towards the end of October. Then I was pleased that they rallied sharply in early November. And now I am worried again after this week's sharp sell-off.

The big news on Wednesday regarding hot inflation had an impact here, but I still view the weakness in this chart as a negative divergence with the strength in stocks. I wouldn't make too much of it for now, but this chart is another tilt in the direction of caution.

Bottom line: The short-term uptrend is probably ready for at least a pause. I'm at about 5% cash which doesn't seem like enough based on these charts. I'd like to be at least 10% cash by mid-week.

People are worried about inflation and often mention the rising prices of groceries or gasoline as proof of inflation, as shown in the CRB index below. But it would be more worrisome if we didn't see inflation because rising prices are also proof of healthy economic activity.

The downside is that these rising commodity prices lead to inevitable Fed rate hikes which impact stock prices. Some people on TV are saying that rate hikes are also proof of economic activity, so rate hikes shouldn't hurt stock prices and particularly off of such low levels. I'm doubtful. 

Why do I mention this? Because I'm worried about it. I know the Fed feels that they can wait to raise rates, but the political pressure of rising oil prices may force them to act.

When the Fed gets close to hiking I want to be prepared, but I'm not sure yet what being prepared looks like. I know there are some stocks that benefit from hikes, but I'm thinking that strong selling in the broader market will bring down all stocks similar to 1987. Or, I should say, I'm worried about the risk. I'm not predicting.

The US dollar has rallied very nicely. If this were a stock, I'd be a buyer because it is a break out from a low double-bottom base, and it looks like it could be headed much higher. Why is the dollar rallying? Here is a quote I got from FXStreet:

"The dollar index surged nearly 1% (the biggest one-day gains in 2021) after data showed US inflation grew at the fastest annual pace since 1990 last month, boosting expectations that the Fed could respond by raising interest rates earlier than expected and before other major central banks."

Of course, with the dollar already rising, the last thing the Fed wants to do is to boost it even higher by raising rates. And besides, the expectation of higher rates is already doing some of the work for them by pushing the dollar higher and creating a headwind against higher commodity prices.

The Fed is facing a dilemma, but it is the same dilemma that every Fed has faced in every single economic cycle that I know of. The easier part of running the Fed is cutting rates. It is raising rates that really test them.

Back to the question of what to do to prepare for rate hikes. To start, I don't think this is the time to be buying stocks with the attitude of holding for the classic three- to five-year time frame. Instead, I'm a buyer of what's hot right now, using tight stops, and carefully watching the winners for sell signals.

I'll end the discussion with the comments from the ECRI that I also showed last week.

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).