The Short-Term Trend

A new short-term uptrend started this past Tuesday, March 9, as shown by the white candle below, and I have re-deployed my cash back into the market. 

The time for me to get aggressive is when the PMO is at the bottom of the range and starting to move higher, such as what was seen this past week. I was a little more aggressive than usual about re-deploying my cash because I have a feeling that this is going to be a brief uptrend. Like everyone else, I'm worried that yields will spike again. Also, I completely avoided any technology stocks and focused entirely on financials, materials, energy, and industrials.

There is another problem, however, which I will discuss below after browsing the basic charts I use to show the short-term trend.

The new uptrend was confirmed by a turn upwards in the SPX Summation Index.

On Monday, the number of new lows dropped down dramatically, indicating that the selling pressure was gone and that the market could start to trend higher again.

On Monday, the bullish percents started to trend higher again, which also added confirmation to the new uptrend.

Finally, the 10-day Call / Put turned higher on Friday, although it was a late confirmation. 

That's a lot of confirmation for a new uptrend. So, what's the problem?

The only problem with this uptrend is that the NAZ-100 is still under its 20-day average where it is finding resistance, and the market probably can't advance too far or for too long without NDX participation. The chart below looks suspiciously like a setup for a short sale. 

I'm thinking that the Nasdaq is completely under the control of the 10-year yield. If the yield goes down, the Nasdaq will head higher and it will easily blast through any of the short-term resistance. On the other hand, if the yield goes up, then the Nasdaq goes down -- the only question is how far down?

You knew that this chart would be next. The 10-year yield rose sharply on Friday after we all thought we were done worrying about the 10-year yield for a few weeks. But here it is again.

There has been quite a debate this week about whether we should avoid technology or continue to own it and ride out the weakness until it is back in favor again. 

I'm not the kind of investor/trader who can ride out weakness in a stock. It is guaranteed that if I decide to ride it out by holding technology, then I will get impatient and sell exactly at the bottom. So, knowing myself, I have to use any strength in the market to sell my remaining technology and hope that I'll be smart enough to get back in when the time is right.

The Longer-Term Outlook

The ECRI index continues to tick higher, pointing to economic growth. Is it worrisome that this index continues to tick higher and higher? Is this index pointing to an overheated economy four to six months from now? I think it might be, and the worry is that the inflation pressures will be too great for the Federal Reserve to resist raising short-term rates.

Lakshman Achuthan discussed inflation this past week. He says that we are experiencing "cyclical" inflation, and not "transitory" inflation as described by the Federal Reserve. The last cyclical upturn, in his opinion, was in 2016 and it lasted until 2018, a two-year period of inflation.

Lakshman says that we are now about six months into a cyclical upturn in inflation, and this cycle of inflation will be with us for longer than we think. As you may know, I think very highly of the opinions of Lakshman Achuthan, so I'm taking this seriously. 

I'll be investing in areas of the market that will benefit from inflation and higher rates, and I will also be quicker to take profits because I know that fears of inflation are what generally ends a bull market. At some point, higher inflation will lead the Fed to raise short-term rates, and rising short-term rates will lead investors to start to sell stocks.

Moving on to market sentiment, the percent of bulls has dropped way down in a couple weeks, but it still seems too high to me. Also, I'm thinking that after a period of about four months where sentiment was overly bullish and the market continued to rise, we need to see sentiment really bottom out before it starts to favor stocks again. So, from a contrarian point-of-view, I think sentiment continues to work against stock prices.

And speaking of sentiment, there were some comments I read this morning about sentiment towards bonds being overwhelmingly bearish, and this may mean that we are close to a short-term bottom in bond prices. Very interesting.

Outlook Summary

• The short-term trend is up for stock prices as of March 9 (new uptrend).
• Contrarian sentiment is unfavorable for stock prices as of Nov. 14.
• The economy is in expansion as of Sept. 19.
• The medium-term trend for treasury bonds is down as of Oct. 10 (prices lower, yields higher).