Image source: Pixabay

The short-term downtrend looks set to continue -- that is, unless you own tech stocks, specifically semiconductors. Friday was an incredible day in the market, but the majority of stocks are still in correction mode, as you can see in the chart below of the PMO index, which is still at the bottom of its range.

The chart below, which illustrates the bullish percents, supports the view of the market shown by the PMO Index. There isn't a hint in either exchange that the bullish percents are ready to turn higher. On the other hand, after several weeks of a short-term downtrend, these two indicators really haven't moved lower by much, which I think shows that the correction is occurring within a strong market.

The major indexes all broke out on Friday. It seems wild to say the general market is in a short-term correction while the indexes break out, and these are impressive breakouts from the bases that started to form in mid-December. But it is really only technology moving higher, and technology is such a large percentage of these indexes that they are pushing them to new highs. This is a bullish indicator.

Among the number of PMO indexes provided by StockCharts, the NDX is the only one that turned upwards on Friday. I certainly like the looks of this.

On Friday, the new 52-week lows were at a level that continues to indicate selling pressure behind the scenes in the market.  When the PMO index finally starts to move upwards, indicating a new short-term uptrend, then we should see the number of new lows on the NYSE move down to harmless levels.

You might be asking, who cares? If the major indexes are moving to new highs, what difference does all this make?

First of all, I would respond to this question by saying that you never fight the market. If the indexes are moving to new highs, you jump on board with them. And if technology stubbornly wants to move higher, you jump on board with technology and ride higher with its strong uptrend.

Secondly, I would say that it is always a good idea to have a clear view of what is happening in the market, so that you know where to put your money and whether you should be raising or deploying your cash in and out of stocks.

With that said, now what? As I mentioned last week, the strength of some stocks has been drawing me back into the market despite the short-term downtrend, and I started the week with only about a 15% cash position. I was quite nervous last week that I had deployed cash too early, but now it seems to have paid off.

Regarding all areas of the market outside of technology, I'm sticking to the basics. The PMO index has been at the lows of its range long enough that I'm now looking for opportunities to deploy cash into stocks. To have cash to deploy, I may need to use margin, or I may need to trim some of my current positions.

The only areas of the market that I believe are ready to compete with technology for leadership are the homebuilder and construction industrial stocks. These two ETFs have been trading near their highs for six weeks or so, and I don't see any way that these don't break to new highs once the next short-term uptrend begins. This is a bullish indicator.

There was an interesting discussion on one of the CNBC shows on Friday. The guest said that he thought the current rally in tech reminded him of the early stage of the internet boom, and he added that the rally could last several years and will probably end with a blow-off top.

Even though I usually disregard predictions and exaggeration on these shows, I think it makes some sense. Combine the AI boom with Apple's release of Vision Pro, and it seems as though we have entered a major new era for technology.

Even if you aren't intrigued by the idea of a new era, then maybe the thing to do is just sit back and ride the trend higher, as shown in charts like the one below. Can you find a more bullish chart than this one?

The 10-year and 30-year yields moved higher this past week, and it looks like yields are normalizing within the strong economy that also has sustainable inflation numbers. In order words, it looks like shorter-term durations are flattening out while longer durations are moving higher, and this is aligning yields as they should be. So, I think it is a good thing in general, although it always makes investors nervous to see the 10-year yield rising.

The ECRI leading index continues to point higher, indicating economic strength in the short-term. This chart points to a good economy in the months ahead, and that generally favors higher stock prices within the normal ups and downs of the stock market's short-term cycles.

Outlook Summary

• The short-term trend is down for stock prices as of Jan. 2.
• 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 November 2023 (yields down, prices up).

More By This Author:

The Market Continues Its Short-Term Downtrend
A New Short-Term Downtrend Started In January
The Short-Term Uptrend May Be On Its Last Legs