Flipping The Trend

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I've been complaining for weeks that the PMO index has been choppy and lacking in direction, which has been preventing me from seeing a short-term market trend. In mid-October, the PMO index flipped that scenario entirely and climbed consistently higher to the top of its range, only to completely reverse in one day with a truly huge collapse on Friday.

This market has been really difficult -- that is, unless you were smart and decided to step aside from the market altogether at the first signs of trouble in May.

The bullish percents hinted that there was a problem with the mid-October rally as the PMO rose to the top of its range, but the number of stocks with buy signals remained weak. This was a negative divergence, and by Thursday of this past week, the bullish percents of both major exchanges reversed and started to point lower.

The Summation indexes in the chart below confirmed the weakness shown in the bullish percents as they dipped below their moving averages.

The chart of the junk bond ETF also shows some price weakness. In September, the price of this ETF broke below its uptrend, before it fluctuated up and down to print a lower low. This is a bearish price pattern.

Clearly, this chart is pointing lower, and, as a trader, if you are going to follow the adage that we should invest in the direction of junk bonds, then you would be smart to have a lot of cash in your accounts. However, even though junk bonds have been weak, the weakness still isn't terrible, so I am hanging on to a sliver of hope for this market.

The basic chart of the SPX shows a market that peaked in late July and has been pulling back since then while experiencing a few counter-rallies. Prices have pulled back, and most recently on rising volume which is a bearish sign, but now the index sits just above a support level.

Let's wait and watch how the market behaves from here. Besides, this is a favorable time for stocks and there has been so much selling that maybe, in contrary fashion, it is starting to favor higher prices for a time.

The number of new 52-week lows indicates a high degree of caution for traders. It is one thing to have a lot of new lows while the market selling off. That makes sense; while the market is undergoing selling pressure, you would expect new lows.

But, except for Friday of this past week, the PMO had been rising, meaning that momentum had shifted in favor of higher prices in the short-term. And yet, despite the upward price momentum, there was an increasing number of new 52-week lows. This is not good. This indicates that there is a problem. Overall, this activity is bearish.


Bottom Line

This is a bad market. This is no time to be trading. The short-term cycle is entirely unclear, and the number of new lows is unacceptable. My accounts are about 30% long stocks, most of which are long-term holdings.

This next chart shows 20 years of the SPX. There is a very nice, upward sloping trend line that ignores the extreme lows of 2009 and 2020. It looks like the market wants to test this trend line, and this test will be an important signal.

I've included the the Zahorchak NYSE market indicator in the lower panel. I use this indicator to tell me whether to be in or out of the market, and it has just recently dipped below the zero line, which is an early warning that the larger market trend is under pressure.


Outlook Summary

  • The short-term trend is uncertain for stock prices.
  • 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 August 2023 (yields up, prices down).

More By This Author:

Is There A Good Chance That A Rally Has Begun?
Too Soon For An Uptrend?
The Short-Term Downtrend Flipped Up

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