A New Short-Term Downtrend Started After A Brief Uptrend

A short-term downtrend started on March 7 after a brief uptrend that began on Feb. 24. The short-term trends are getting shorter, and they are not reaching the top and bottom of the PMO range before turning.

The Feb. 11 downtrend couldn't reach the bottom of the range. Then the Feb. 24 uptrend was short-lived and turned lower at the 70 level. Now the current downtrend has stalled at the 14 level, even though it feels like the current downtrend is just getting started. 

It is obvious that buyers are reluctant to continue to step in as the market advances short-term, so the advance in the PMO index keeps stalling. But the sellers also dry up as the market declines short-term, so the decline in the PMO index keeps stalling as well.

I think this is because each day in the market has such large percentage swings. As a result, the players in the current market are emotional, news-driven, more short-term oriented, and are taking profits quickly.

This chart is a look at the price action of the SPX in the upper panel with the PMO index in the lower panel. The PMO index is shown because it does such a good job of showing the short-term trends. You can see in the upper panel that the larger trend is obviously lower, there are well-defined short-term cycles within this larger trend, and the short-term cycles are confirmed by the PMO.

This chart shows that the best trading strategy for the last three months has been to sell into the rallies and then look to cover after a short period of strong declines. The signal to cover has been seen during the classic, huge price reversal days - when the PMO is near its low, such as Feb. 24 and March 24. 

I'm thinking it is time to start looking for another one of these short periods of strong declines that result in a reversal day.

This chart shows the major indexes trending lower over the last week, but with a big profit-taking day for the shorts on Wednesday after two very bad days in the market. News sources said that some optimism in Ukraine was responsible for Wednesday's rally, but I think it is more likely that the shorts are taking profits quickly and often, so after two days of big gains they were ready to cash in, which sent the market up for a day.

Junk bonds resumed their strong move lower after finding a couple weeks of support in late-February and early-March. It is always good to watch the direction of junk bonds prices and to trade stocks in the same direction. Right now, junk bond prices are suggesting lower prices for stocks.

The chart below of the number of new 52-week lows continues to show elevated numbers which reveal serious selling pressure. Until new lows decline to harmless levels, the market will continue to move lower. This is the chart I prefer to use when looking for signs of a significant market bottom.

As an example of what to watch for in the chart of new 52-week lows, the chart below is a look back at the 2009 period. There was a huge spike in new lows before the bottom, and then an abrupt decline in new lows followed by consistently harmless levels. This was the signal to get back in.

Here is another look using 2018. The market sold off with huge numbers of new lows, and the signal that it was time to buy came with a dramatic price low followed by a huge drop in the number of new lows, and then the new lows remained at harmless levels in the days that followed. 

There are other good methods of finding a market bottom, but this is the one I prefer to use because there is such a clear change in sentiment revealed by the dramatic drop in new lows once the bottom is in.

As mentioned earlier, the short-term trends are getting shorter and not reaching the top and bottom of the PMO range before turning. I'm thinking that this new tendency resembles a coiled price pattern that may result in strong price movement. I'm guessing that if there is a strong price movement, it will be in the direction of the larger trend which is lower.

The chart below doesn't look good for stock buyers. Prices are below a downtrend and resistance. And based on Friday's close, prices look to be pointed lower. When you combine the negative look of this chart with the elevated number of new lows, and the coiled look of the PMO index, I'm thinking there will be lower stock prices next week.

Bottom Line: I'm a bear and I am reluctant to buy stocks with a holding period longer than a few days. I'm about 35% short the market via bear 3x funds. I'm not sure why, but I have a few stock holdings that will probably be sold on Monday.

The ECRI is now watching their indicators closely for signs of a recession, and their index is now sitting at zero. After watching this indicator for many years, I find that when the index is within the 0-to-2 range, there is risk of larger than average price corrections in the market.

When it moves below zero, it is time to be quite defensive in stock portfolios, and under the -5 level means it is time to be out of the market completely, and that includes being out of all defensive stocks such as utilities and staples. Also, being under that -5 level indicates the need for extreme defensiveness by owning longer-term Treasuries.

At the moment, there are still a few areas where people are making money by owning stocks in groups such as energy, shippers, fertilizers, metals, in addition to the defensive stocks. Also, the trend for longer-term bonds is still lower. This seems consistent with the past, when the ECRI index was in the zero to -5 range.

Outlook Summary

  • The short-term trend is down for stock prices as of March 7.
  • The economy is at risk of recession as of March 2022.
  • The medium-term trend is down for treasury bond prices as of Jan. 3 (prices down, yields up).

Disclaimer: I am not a registered investment adviser. My comments reflect my view of the market, and what I am doing with my accounts. The analysis is not a recommendation to buy, sell, ...

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