Image source: Pixabay

A new short-term uptrend started on Wednesday, May 25, and the PMO index went from zero to 100 in just three days. If you blinked, you may have missed the low-risk window of opportunity to buy stocks.

Of course, the question is how long will this rally last, and obviously, I don't know for certain. But I do know that, as always, during bull or bear markets, when the PMO index is at the top of its range, it is time to get cautious short-term when buying stocks and to look for opportunities to lock in profits.

This chart shows three good indicators of a short-term uptrend. The SPX popped up above its 5-day average, and on the same day, the PMO moved higher while the number of new 52-week lows dropped down to a much less alarming level. The combination of the three indicators gave a good buy signal.

The bullish percents also made significant moves higher over three days, and fortunately, they look like they still have some room to run higher. Last week, this chart provided a hint that stocks would rally because it showed a bullish divergence. The market was trading lower while the bullish percents were holding above the previous lows.

One of the first signals that the market was moving higher came on Tuesday when this junk bond ETF rallied while the market was trading lower. The ETF has been strong since then, confirming the stock market rally. However, it is already facing a test of its downtrend line.

The oversold momentum indicator has curled higher, showing a nice, classic buy signal from a low level. Too bad, though, that the S&P 1500 is now facing overhead resistance from all the people who now want to sell the shares they bought at higher prices. I wouldn't be surprised to see this major index briefly rally past the resistance lines for a few days, but the supply from sellers will quickly become a problem.

New 52-week lows have settled down to harmless levels. If new lows stay at these levels, the market can continue to rally. If not, then the market rally will eventually falter and the larger downtrend in prices will resume. 

I covered my shorts early on Monday because I realized while writing last weekend that the market was too oversold to be short stocks. So, I dodged a bullet, although I'm disappointed that I put myself in that position. 

I added to longs on Tuesday when I saw junk bonds rally, and then I added again on Wednesday and Thursday as prices continued to move higher. On Friday afternoon, I started taking some profits because I like to raise cash before a long weekend, and because it was such a sharp rally that I'm afraid it might lose its momentum quickly next week.

I am about 20% long mostly lithium and energy-related stocks, and I have a very small short position in a bear 2x gold miner ETF.

Speaking of short positions, I'm watching for the next opportunity to short the market via inverse funds. The best opportunities often occur near the 50-day averages of the major indexes. I'm looking to short on any failed rallies above the 50-day or the blue resistance lines.

Treasury yields peaked during the first week of May, and now they are looking like they may fall beneath their 50-day averages. Could it possibly be that we are already seeing peak yields? 

In many bear markets, first yields peak as investors buy Treasuries to protect capital, and then oil prices peak as demand destruction undermines the oil price uptrend.

The prices of oil and natural gas look to me like they are still headed higher, and as they rise I would expect to see Treasury yields move higher in response. However, if yields don't move higher, then it means that the focus has moved from concern about inflation to the preservation of capital due to recession.

Another look at new lows. This is a chart of the market in 2009 through 2010 to illustrate how 52-week lows help trade the market. 

Let's move back to the PMO Index. I'm including this chart to show (and remind myself) that the market moves in these short-term cycles, and to emphasize that the cycles occur during both bull and bear markets.

There are usually about nine times per year when the PMO is at the low of its range, and this is the time to be looking to buy. You can't just buy as soon as the PMO hits the zero-level, but it is the time to look for opportunities and to be ready to buy when the market starts to turn higher.

Recession Watch

"The economy is close to entering a recession, perhaps as soon as this year." Lakshman Achuthan, ECRI Institute, May 26, 2022.

In my experience, when this index is below the zero level, the economy is struggling, the risk of recession is high, and it is time to be very cautious as a stock trader. When this indicator falls below the -5 level, a recession is almost certain and it is best to be out of the stock market. 

Outlook Summary

• The short-term trend is up for stock prices as of May 25.
• 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).