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Believe it or not, the short-term uptrend looks set to continue, but it does appear to be on its last legs. So, it is definitely time to prepare for the inevitable pullback in prices by protecting profits and having some cash to deploy back into stocks when the PMO index, shown in the chart below, reaches the bottom of its range.

There is a concern though with this very basic approach that I have of raising cash when the PMO is at the top of the range, and deploying cash when it is at the bottom of the range. The concern is that there is too much of a consensus about what the market will do next.

It is unlikely that there is a single person out there who isn't, at this point, optimistic about stocks in the longer-term but concerned about stocks in the shorter-term. Of course, with so much consensus, that means we need to be open to the possibility that the market will do exactly the opposite of what the consensus expects to happen.

First, let's review the standard short-term market indicators. Each of the three major indexes remains at or above the five-day averages. A new short-term downtrend can't begin until there is a solid close below the short-term moving averages.

The bullish percents are still pointing upwards and above their five-day averages, which also confirms the continued uptrend.

The momentum indicator of the NYSE commons-stock-only advance-decline line is still pointing upwards too, but there is a bit of a kink in the momentum line suggesting that a cross-under sell signal is developing, perhaps.

The health of the market is determined by looking at the number of new 52-week lows, and, as has been the case since mid-November, the number of NYSE new 52-week lows has remained at harmless levels. This means that the market is basically healthy behind the mask of the major indexes, and this indication of health will provide some confidence about deploying cash back into stocks during the lows of the next short-term down cycle.

As a reminder, we expect the number of new lows to rise as the market sells off, so that's okay. But we should see the number of new lows at harmless levels when the market rallies upwards, and this tells us the market price action is healthy and that stocks are worth owning for capital gains.

The health of the market based on the number of new 52-week lows on the Nasdaq is a little more difficult to assess. There are a lot of poor-quality stocks on the Nasdaq exchange, and it is to be expected that a year or so of an inverted yield curve would have serious consequences for these stocks, so an elevated number of Nasdaq new lows could mean that the improved interest rate conditions are coming too late for these stocks.

But with that said, the trend has been improving for the Nasdaq new lows, so let's not spend too much time thinking about it, and let's just acknowledge that it is a concern worth remembering if we start to feel too euphoric about the gains in our trading accounts.

Bottom Line

Stock prices are extended, while at the same time, the market is giving us that feeling that we don't need to worry about prices going down. That is a dangerous combination. I'm protecting profits while trying not to miss out on the opportunity to make money.

If you watch CNBC or other media, you may know that the conversation has been dominated by discussions about what the Federal Reserve is going to do next regarding rates. But then, every once in a while, they will have someone on one of the shows who reminds us that the Federal Reserve really doesn't decide what is going to happen to interest rates. The bond market decides where rates will be and the Federal Reserve has no choice but to follow the bond market, and the chart below illustrates this.

The red line is the 2-year Treasury yield controlled by the market, and the blue line is the Fed Fund Rate set by the Federal Reserve. As you can see, the two lines correlate closely, and the 2-year is pointing decisively lower at the moment, meaning that there is a good chance that we will see the Fed Rate lower as well. Of course, I should also add that Chair Powell has stated that he plans to lower rates.

So, we are fairly certain that yields are coming down, and we know that lower yields favor stock prices, so what stocks should we be buying when the time is right? In my opinion, don't try to anticipate the answer and instead let the market tell you. This means watching the relative strength of stocks and industries.

The first and most obvious choice is US Technology, and as shown by this next chart, this group is just now breaking to new highs. This is a bullish indicator.

Another good choice is home construction, and I'll expand the category to include all construction and supplies. This is another bullish indicator.

The metal and mining stocks supply the industrial companies that supply the builders, and this ETF looks to me as though it could be getting ready to move higher. I'm not a buyer until the breakout occurs, but I am watching.

The Brokers shown in this ETF are near to a breakout, although the relative strength isn't leading. I'm watching this for now.

Health Care stocks have been dismal performers, as shown by the very poor relative strength, but if you like to have a few solid long-term holdings that you can get at good prices, then I think this may be an opportunity. This ETF is showing a multi-year sideways formation that will eventually burst to new highs, and when it does, it could be a powerful move. I'm mostly on the sidelines watching this for now.

Outlook Summary

• The short-term trend is up for stock prices as of Nov. 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).

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