General Stock Market Commentary

On Friday, Oct-08, the PMO spiked sharply higher as shown in the chart below. It is impossible to look at this PMO chart and see a downtrend, so I am reluctantly labeling it as the start of new uptrend. I'm reluctant because the backdrop for stock prices is worrisome and confusing at the moment.

The first requirement of a new uptrend is for the majors to close above their 5-day averages which occurred on Tuesday with upside follow-through for the remainder of the week. This doesn't look too bad although it is unfortunate that indexes had a weak close on Friday.

It took until Thursday for the bullish percents to confirm the new uptrend, but now they are pointing higher although disappointing on Friday.

The 10-day equity call/put never turned higher. Obviously, this isn't the look of an index showing us that traders are enthusiastic about buying calls.

The inverted VIX showed a very nice bullish diverence with the SPX from mid-September to early-October, but now it isn't showing much strength and is still in a pattern of lower highs.

Junk bonds are pointing decisively lower. I think it is generally a good idea to trade stocks in the same direction as junk bonds, so at the moment this is a serious caution for stocks particularly if your trading is mostly small-to-mid cap growth stocks.

There are still way too many new lows. In September we had too many new lows on the NASDAQ, but in October the NYSE joined the NASDAQ with elevated new lows. For me, this is a signal to sell into strength until the level of new lows is bullish which occurs when the new lows on both indexes are well below fifty.

Small caps are still treading water. Usually, I think it is a good idea to watch this ETF to see which way it breaks to help get a sense of the larger trend for the general market. But now? I would be happy just to see this index stay above the lower trendline.

I have a hard time believing in a short-term uptrend with the cumulative advance/declines looking weak like this. A rising AD line usually occurs a few  It isn't too bad at the moment, but it hasn't yet indicated a market ready to break higher.

I have added this chart of the SPX AD line to illustrate. In the last four cycles, the AD and the SPX bottomed out just as the PMO was initially hitting its lows. Those were the buying opportunities. This cycle is different. It doesn't look too bad, but the SPX and the AD did not pushing higher in advance of Friday's spike in the PMO. 

So far, this chart looks somewhat negative, but I'm trying to watching with an open mind. At the moment, this chart is saying that that the market will move lower again, or at least continue to struggle. But I keep reminding myself that we exiting the weakest seasonal period and entering the strongest seasonal period, so we could be pleasantly surprised.

There was a lot of talk this week about the strength of the oil stock leadership, and the high price of oil. High oil prices are almost always what forces the Fed to raise rates near the end of a bull cycle and there is a good chance that the Fed may need to at least get started soon. Currrent prices really aren't too bad yet if you look back at prior cycles, but with short-term rates as low as they can go, the Fed is going to feel the pressure soon if oil prices break too much higher.

Longer-term yields certainly look like they are headed higher. I noticed from this chart that when yields started to rise in February, there wasn't a close below the 10-day until the trend finished. Something similar may be happening again because there hasn't been a close under the 10-day for about three weeks. Some people think that the market should be able to handle rising rates, but I would rather step aside.

Investor sentiment certainly favors higher stock prices from a contrarian point-of-view. With the percent of bulls 40%, market history suggests a good buying opportunity. But I want to see my breadth-related charts do a better job of confirming higher prices.

Outlook Summary

The short-term trend is down for stock prices as of Sep-07 (bad call on Sep-23)The economy is in expansion as of Sep-19-2020The medium-term trend is down for treasury bond prices as of Sep-23 (prices down, yields up)

Strategy During a Bull Market

• Buy large-cap stocks and ETFs at the lows of the longer-term market trends
• Buy small-cap growth stocks on breaks to new highs in the early stages of market trends
• Reduce buying when the market trend is at the top of the range
• Take partial profits when the market uptrend starts to struggle at the highs

Trader Discipline

• Don't be afraid of corrections, because they are opportunities
• Never invest based on personal politics.