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Look at these indexes in the chart below as they push to new highs. Can you get a more bullish-looking chart? And yet the breadth indicators are not confirming.

I'll review the indicators, but let me first say that the stock market is never easy, and just when you think you have a system to use in all market conditions, it fools you and challenges you even further. Because of this, I rarely believe those guys in financial media who act like they know the market. I prefer the humble speakers who can only say for sure that the stock market is a game of probabilities.

Most of the discussion about the stock market is about what stocks to buy, and after that, there are the endless predictions about what the market will do next or what the Fed has in store. I'm interested in what stocks to buy for sure, but I'm more focused on what the market is doing right now and what message the market is sending. I'm much less interested in predictions, although it's fun to discuss sometimes. But listening to people talk about the Fed is not.

My real focus regarding the stock market, and what I like to discuss the most, is when we should play offensive by being aggressive buyers, as opposed to when we should play defense, for which there are a number of strategies such as taking partial profits, hedging positions, moving to cash, or even shorting the market.

Below is what once was my favorite go-to chart regarding the stock market's short-term trend. My thinking was that this chart revealed the market's breadth. In other words, this chart showed what most stocks were doing and that the safest and easiest strategy to make money was to invest along with how most stocks were trending, as well as trying to time purchases or sales at the turning points in the short-term trend.

However, as has been mentioned many times in this blog and in financial media for many months, the major indexes are pushing higher and higher, but the majority of stocks are not participating. My theory is that this condition exists because of the inverted yield curve, but who really cares why?

Right now, the best way to make money is to invest in the direction of the trend indicated by the QQQ and SPY, and to buy the stocks most responsible for pushing these indexes to new highs. For now, it is as simple as that.

This chart shows the NYSE BP pointing lower while the Nasdaq BP has turned upwards. Maybe this chart tells us that the NYSE stocks are consolidating their big gains since last November, and that maybe there is some caution settling in as the inverted yield curve finally does its thing by slowing economic activity.

What about the Nasdaq? These lesser-quality stocks have been struggling for some time due to the inverted curve, and maybe they have now reached the point where their low valuations make them appealing compared to the NYSE?

A good alternative to investing based on market breadth is to invest in stocks based on the direction of junk bonds. At the moment, junk bonds, as shown by this ETF, are saying to buy stocks. If this were a chart of a stock, I'd be a buyer for sure.

Bottom Line

I started buying the leading stocks a couple weeks ago based on the direction of the PMO index. I'm not sure that was the best indicator to use, but it has worked out.

Now, after reviewing these various indicators, I'm thinking the best way to follow and trade this market is to stay invested until the QQQ and SPY break down below the 21-day exponential averages, as shown in the very first chart. I might take partial profits along the way, but I won't be an aggressive seller until then.

Meanwhile, my favorite longer-term indicator looked like it wanted to turn lower, but then broke higher. For now, this chart is bullish for stocks but with caution.

This commodity ETF is looking bullish again after appearing like it would break down a few weeks ago. As stock investors, we want commodities to move higher because that confirms healthy economic growth, but we definitely don't want commodity prices to move too high too fast because that raises the risk of inflation. At the moment, this looks just right.

Software stocks are all the rage again, and this ETF certainly looks promising. A break out above these previous long-term highs would be very bullish for software and the general market.

Large-cap consumer stocks also look very promising, although it is hard to tell with some of these stocks whether they are consumer or technology. But it doesn't matter because this ETF is breaking out to new highs.

My two former favorite ETFs are looking a bit sad at the moment. A bit of concern about economic growth, combined with the need for consolidation, sees these stocks under pressure.

It doesn't matter what else you see, read, or hear about this market, as long as these two ETFs are headed higher, so is the general stock market. This is a bullish indicator.

Gold is starting to look attractive again after a few weeks of consolidation. This is a good-looking chart.

Yields are pointing lower, meaning bond prices are headed higher. Stocks and bonds are rallying.

Forget what the Fed says they will do. If the 2-year yield points lower, Fed Funds will likely head lower, too.

The ECRI continues to point lower, meaning slower growth. However, with this index so far above the zero level, I'm not concerned about the economy for now.

Outlook Summary

• The short-term trend is uncertain for stock prices at the moment.
• The ECRI Weekly Leading Index points to economic recovery as of July 2023.
• The medium-term trend is UP for Treasury bond prices as of Feb. 1 (yields down, prices up).

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