It Is Time To Prepare For The Next Short-Term Downtrend

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The short-term uptrend continues, although it felt as though the market was rolling over on Friday. I thought that the next downtrend had started, but now I see in the charts that the market isn't quite there yet. However, with the rally about four weeks old and the PMO at the top of its range, it is time to be raising cash and preparing for the next short-term downtrend.

Stocks sold off on Friday, but prices are still above their respective 5-day averages. I don't think you can consider the market to be in a new short-term downtrend until prices close below their 5-day averages. This is a good rule of thumb for timing these short-term cycles.

Also, this chart does a good job of showing how the uptrend has been more of a sideways coil with a slight upwards bias. It isn't a very convincing rally.

Junk bond prices certainly confirmed the stock market's recent short-term rally with this sharp move higher, but now the ETF has touched its downtrend line and it's reasonable to expect prices to find resistance. When the price of this ETF starts to point lower, we will probably have the start of the next downtrend for stocks.

The momentum indicator for the SPX equal weight is at the top of its range and has been for a while. It tells me the same thing as the chart of the PMO, that the best time to buy stocks in the short-term has passed, and now it's time to think about raising cash.

The 10-day equity-only call-put ratio looks like it's starting to point lower. The direction of this indicator often turns just before turns in the short-term cycles of the stock market. The PMO index is included as an overlay in the lower panel to show how the two indicators correspond.

New 52-week lows are behaving well. The level of new lows on the NYSE is below the 50-level, which is bullish for the general market. The level of the Nasdaq is a still bit too high, although not alarming.

Based on this ETF, the prices of European stocks look like they are just biding time as they move sideways while they wait for the downtrend line to catch up. 

This is the Martin Pring Dow Industrials indicator. The indicator combines the momentum of each of the stocks in the Dow to produce this smoothed look at the short-term cycles. Pring uses it to find cycle bottoms, but I noticed that it gave fairly good signals at each of these peaks that the cycle was starting to turn lower.

The ECRI leading economic indicator continues to tick lower, and that isn't good news for the economy. When this indicator dips below the -5 level I like to be out of the stock market and to participate with only short-term trades.

It looks to me as though longer-term Treasury yields have topped out for this cycle (lower yields, higher bond prices). The bear market is probably entering the next phase where money moves out of the late-stage stock sectors and into the safety of US Treasury bonds. This is where it gets a little scary, but it has to happen in order make way for the next bull.

Outlook Summary

  • The short-term trend is up for stock prices as of June 24.
  • The economy is at risk of recession as of March 2022.
  • The medium-term trend is up for treasury bond prices as of July 22 (yields lower, prices higher).

More By This Author:

The Short-Term Uptrend Continues Despite Rocky Week
The Short-Term Uptrend Continues, But It Hasn't Been Much Of One
The Short-Term Uptrend Appears To Continue Despite Rough Tuesday

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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