A New Short-Term Downtrend Was Established

A new short-term downtrend started on Wednesday, April 8 with a move lower in the PMO. Last weekend, I mentioned that I thought a new short-term downtrend was close to starting. Yet, on Monday, the market looked ready to rally again, and I was feeling foolish. However, on Tuesday and Wednesday, the selling perked up, the market started to break down, and a new short-term downtrend was established.

So far the new downtrend is uneven, with the Nasdaq stocks looking very weak and the Dow and S&P stocks reluctant to move lower. For instance, on Friday, the Dow was up but the Nasdaq was very weak. Some people on CNBC found it encouraging that the Dow was up while the Nasdaq down, but I don't think it is. When the market is out-of-sync, I see it as negative for stocks in general.

The bullish percents of the major exchanges are pointing lower, confirming the new downtrend. They made big moves lower on Wednesday.

I've re-embraced the use of some the very basic technical indicators, such as momentum. This chart's indicator suggests that upside momentum is coming out of the market, providing a nice confirmation of the breadth indicators as shown by the PMO index and the bullish percents.

This junk bond ETF rallied nicely above its downtrend line in late March, but its breakout has failed and there are four days of red bars confirming the new downtrend.

I look at junk bonds prices because they are generally correlated with stock prices, so the current weakness isn't encouraging for bulls. At the moment I don't want to make too much of this, but it could become important with a break below the March low, which would be a strong technical signal in favor of the bears.

The number of new 52-week lows remains elevated, which indicates that there is selling pressure behind the scenes in this market, and selling pressure doesn't always show up in the major stock indexes. I'm skeptical towards stocks as long as new lows are elevated.

I just mentioned that I am bearish towards stocks while new lows are elevated, but I also mentioned last week that you can't be too bearish while the major indexes are above their 50-day averages, as shown in the chart below.

When you are a technical trader of stocks, you have to get used to reconciling indicators that contradict. I know that at some point either the major indexes will break down below their 50-day averages, confirming the elevated new lows, or new lows will start to behave and confirm the indexes above their 50-day averages. Until then, I know not to get too bullish or bearish, and to be open to the possibility that the market will provide a surprise.

There was a lot of talk about the Semis this week. Some are saying that the shortage of semiconductors makes the stocks in the sector a buy, others are saying the shortage hurts the bottom line of stocks. Instead of overthinking it, I'm just looking at the chart. At the moment, it is fairly negative with prices below the 30-week for most of the year. It also is looking like it might break down below support.

The transports had two very bad weeks, and they also look like they might break down.

The sectors performing the best are utilities, energy, staples, healthcare, and REITS. These are classic, late-cycle, defensive sectors, which serve as a strong tip of the scale towards the bears. In fact, I could have just led this text with these these sentences and left it at that because it tells us most of what we need to know.

Bottom line: On Wednesday, I trimmed all my long positions and added to the bear 3x ETFs in my accounts.

Yields took off higher this past week. My guess is that the economic news is a bit better than expected and the battle in Ukraine has settled into a stalemate for now, so bond investors are less interested in portfolio safety and more concerned about inflation - so they are selling the longer end. Plus there were some aggressive QT Fed comments about reducing their holdings, and the comments added to the Treasury-selling pressure.

The ECRI index has ticked higher for a couple weeks, which is encouraging for economic growth. Lakshman Achuthan has stated recently that recession is a concern, but it is too soon to be forecasting one. 

Outlook Summary

  • The short-term trend is down for stock prices as of April 8.
  • The economy is at risk of recession as of March of 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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