Image source: Pixabay

A short-term downtrend started on Thursday, June 9, and Friday's selling was severe and was mostly attributed to the hot inflation report. But I suspect that the buyers had dried up by Wednesday, and that the market was ready to sell off regardless of the inflation number.

The PMO did its job nicely to warn that the market was near a top in the short-term cycle and that it was time to raise some cash and take partial profits.

Thursday's session was very weak with a close at the day's lows and well under the 5-day average, and it predicted the selling on Friday. Before the downtrend began there were seven days of volatile trading that only took the indexes sideways, and these seven days now resemble a mini-topping pattern.

This chart helps us to step back and to see the short-term cycles. It shows how the PMO helps prepare us for the short-term change in trend. 

The bullish percents turned slightly lower on Thursday after ticking higher for a number of days even though the market only went sideways. The change in the short-term trend from Thursday onwards stands out nicely on this chart.

Junk bond prices started telling us that there was a problem brewing two weeks ago, although I did think there was the potential that this chart pattern would result in a bull flag similar to mid-March.

The weakness in junk bonds is really helping us to navigate the current stock market action, and I suspect that when the market is ready to bottom we'll see the price of this ETF firm up before stock prices.

The market couldn't wait long enough for the momentum indicator to work off its oversold condition before turning lower. Looking at this chart, it is hard to believe that the May lows will hold.

So, what does it mean that the market turned lower with this indicator still below the zero-level? I'm not sure, but my guess is that it's a hint that the market is getting ready for that big capitulation selloff that so many people on CNBC were anticipating before the May uptrend began.

The price action looks classic -- with a break of support in May, then a rally back up to support-now-turned-resistance, and then a sharp failure at that level. This is all very bearish.

New lows ticked up on the NYSE on Thursday, and this was a signal that the trend had turned lower. 

Over the last couple of weeks I saw a number of positive comments about the market, particularly one from Dorsey-Wright, which is a firm I highly respect. These comments, combined with this chart below showing the harmless level of NYSE new lows for a number of days, confused me a bit. But now, with so many new 52-week lows showing on Friday, I'm confident that the bear market is set to continue.

I should also point out that the PMO index is currently at the top of its range, while at the same time this chart shows that there are currently a lot of new 52-week lows. That is a very bad combination. 

If there are a lot of new lows with the PMO at the bottom of the range, it can be a sign that a short-term downtrend is bottoming out. But when there are a lot of new lows with the PMO at the top of the range, it is a sign that some serious action may start.

Thursday's session was a breakdown, and Friday's was a downside follow-through. Also, the moving averages are clearly aligned for a downtrend, and the 200-day averages have rolled over and are ticking lower.

Bottom Line: I am less than 5% long stocks and ETFs, and I am about 65% short via bear 2x and 3x ETFs. I got way too bearish two weeks ago, and it was too early to be shorting. Fortunately, it worked out.

After so much selling on Thursday and Friday, I am very surprised to see the PMO still at the top of the range without a red candle. I suspect that early next week, the PMO will drop significantly, and in only a few days it will be back at the bottom of the range. 

It is an important reminder and tells me that when the short-term changes, I have to move quickly. I don't have the luxury of time to sit and watch and consider. So, I have to do my homework before the market sessions open and be prepared so that I am ready to move.

This chart clearly shows that the market moves in these short-term cycles within a larger bull or bear market. They aren't always clean, easy to trade cycles. When this PMO is at the top, I need to be thinking about raising cash, and when the PMO is at the bottom, I have to be ready to deploy cash.

Small-caps showed some strength two weeks ago, but now it looks like it was a trap. This chart is not looking good. Small-caps appear to be headed lower.

Consumer staples look like they peaked and have now broken down, or are at least very close to breaking down. Selling in this group indicates that we are moving from the denial phase to the acceptance phase of a bear.

Utilities haven't broken down yet, but it does look like we have seen a peak.

Here is a look back at the last major bear of 2008 and 2009. Among the late-cycle sectors, utilities went first, then energy, and then staples. For this bear, it looks like it will be staples first, then utilities, then energy. Not that it really matters, but I find it interesting.

It looks like the ECRI index has broken down under the -5 level. That is the level at which I move my accounts to cash (or short).

A lot of people on CNBC who are very skilled at picking value stocks to buy for long-term investors also think that they are qualified to predict recessions. Isn't that a very different skill set? I personally suggest leaving predictions of a recession to the people who have dedicated their careers to it, such as Lakshman.

Outlook Summary

• The short-term trend is down for stock prices as of June 9.
• 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).