Image Source: Pixabay

Wednesday saw quite the sell-off. It was rather scary because it happened so fast. However, the good news was that the SPX index found support at an important short-term level, and the market seemed to become very oversold.

The PMO Index has now reached the extreme low of its range. When the PMO reaches this level, it is way too late to sell stocks. Instead, it is time to look for buying opportunities before the market turns higher again (I should point out that this is what I do, and you have to make your own buying decisions).

It is difficult to be a buyer at this level because it is intimidating, and it always feels like the market will just keep sinking lower. Sometimes, it does sink lower, such as in the late summer of 2023, which was just last year. However, the market usually bottoms and turns higher after this.

The bullish percents of the major exchanges have been pointing lower decisively. When the short-term trend bottoms and turns higher, we should see these two indicators stabilize and then turn higher as well.

This next chart shows the percentage of stocks above the 50-day average for both exchanges. Similar to the NYSE chart above, these two indicators have moved down to levels that suggest traders should be looking for the next short-term rally.

The Summation Indexes look weak at the moment, particularly the small-caps. These indicators continue to point to a downtrend. I will be watching these closely to see if they start to stabilize.

The chart below provides a much broader view of the NYSE common-only summation. It looks really oversold at this point.

Junk bonds pulled back from their highs, but they found support and have continued to look favorable. Of course, there are a number of ways that the trendline can be drawn, so it is a bit subjective. Still, I would say that this bit of strength shown in the chart of this junk bond ETF is a good sign for stock prices.

NYSE new 52-week lows continue to be elevated, as shown earlier. When the next short-term uptrend starts, the NYSE new lows will drop down below the 50 level.

Bottom Line

I started to deploy cash back into stocks on Thursday and Friday. I'm thinking that the short-term downtrend will bottom out soon in favor of the next short-term uptrend. Of course, I could be wrong and thus be forced to sell what I've just purchased. If that happens, I will attempt to cut my losses quickly instead of stubbornly holding on to losing positions.

Meanwhile, the weekly indicator of the market's longer-term trend issued a sell signal last week. I'm not going to make too much of it just yet, but this is certainly a reason to be cautious towards stocks. If the market rallies short-term, but this indicator remains on a sell signal, I will raise cash sooner and more aggressively so that the level of cash will be much higher than usual.

The semiconductor chart continues to look perilous. This is a setup for a head-and-shoulders top. I will be watching to see if this market-leading ETF breaks down below the red trend line.

Next, here is a picture of how this sentiment indicator looked on Thursday evening. When the extreme fear level is reached, in my opinion, it is time to looking for buying opportunities.

Outlook Summary

• The short-term trend is down for stock prices as of Dec. 6
• The ECRI Weekly Leading Index points to economic recovery as of July 2023
• The medium-term trend is up for Treasury bond prices (yields down, prices up)

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