Image Source: Pixabay

Have you ever seen such a beautiful uptrend? Since the late October low, the market has moved higher. And yet, since mid-January, I have been saying that I couldn't discern the direction of the short-term trend.

Usually, stocks will move up and down together in short-term trends. If you buy stocks early in the short-term uptrend, it greatly reduces the risk of your purchases and increases your chance of making money.

To illustrate the short-term trend in which stocks are moving up or down, I have been using the PMO index that is shown below. This index is a tally of the number of stocks in a momentum uptrend. The PMO is very similar to the MACD.

This chart of the PMO shows that, despite the nice uptrend in the SPX, only about half of all stocks have been in momentum uptrends for most of February, which means that the market has pushed higher despite a fairly narrow level of participation.

I wouldn't be so focused on this issue if this out-of-sync condition was only seen in February of 2024. However, it has existed for the better part of a year if you look back to the summer and fall of 2023. In other words, the trading system that I have used for so many years has broken down.

What to do? For now, I am focusing less on the market trend and more on what individual stocks are doing. I think that stocks will eventually start to trend together again, but until then, I'm using a different system.

My results really weren't that great for most of 2023. So, in November, I started using the chart shown below. I changed from a daily chart focus to a weekly one, and I'm less focused on timing buys and sells based on the behavior of the market. Instead, I'm letting the stock or ETF give me buy-sell signals.

This chart does a good job of showing how and when to buy, but it doesn't show how and when to sell. You often hear that selling is a more difficult decision than buying, and I'm tempted to agree with that.

I still think it is wise to trim positions that rise too far and fast, but my best idea for selling is to use the weekly closing prices and moving averages as stop levels. For instance, in this chart, I would only consider selling if the price dips back down Friday's close, and I would definitely sell if it dips below the moving average.

I would also use the relative strength in the lower panel to help with the sell decision. Usually, when a stock is setting up to be sold, the relative strength shows weakness before the price begins to weaken.

Bottom Line

At the moment, I am about 90% invested in stocks. On Friday morning, I was adding to positions in stocks that were participating in the rally, but by the close, I was trimming a few positions that looked extended.

This is a powerful and unusual market rally. I'm happy to be making money again, but I'm also nervous because I'm operating with a new trading system. I'm ready to raise cash if the market gets too extended, or if my stop points are hit.

Here are some nice-looking charts. The Transports have broken out, which is always a good sign for the economy as well as stock prices.

Materials are just now breaking out, and I'm hoping to see some follow-through next week.

Retail stocks are showing new signs of life. This chart looks bullish to me.

Defense stocks are showing a nice break to new highs. This is a bullish indicator.

Outlook Summary

• The short-term trend is uncertain for stock prices at the moment.
• The ECRI Weekly Leading Index points to economic recovery as of July 2023.
• The medium-term trend is down for Treasury bond prices as of November 2023 (yields up, prices down).

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