Not Yet A New Uptrend

The market was strong on Friday, but volume was weak, and the charts are not yet indicating that a new uptrend has started. Some indicators have started to move higher, others look ready to move, and the PMO has been at the lows for quite a while.

If there is a confirmation of a short-term rally early next week, I'd probably be a buyer of some short-term positions in inflation-sensitive stocks, but I would maintain a high level of cash and also probably be looking for opportunities to take profits quickly. The market setup isn't good.

Let's first look at the short-term indicators, and then at the charts that will keep me mostly in cash (or short).

This chart shows that the current short-term downtrend has lasted quite a while, and many people who follow the market have been expecting a rally for a number of days. The reversal from the lows on Thursday combined with the follow-through on Friday are hopeful signs that a rally may start early next week.

This chart shows the stage is set for higher prices, with the major indexes popping up above their 5-day averages.

The bullish percents of the major indexes responded well on Friday, so if the market is going to trend higher, look for upside follow-through of these bullish percents early next week.

This momentum indicator looks ready to turn higher. (I like this indicator because it is slow, smooth, and it gives many reliable signals - particularly when it is near the extremes of its range. Plus, I'm a big fan of Martin Pring, the author of the indicator.) Looking at the S&P 1500 in the upper panel, the index looks ready to retrace at least up to resistance, but I'm doubtful that prices will sustain a break above that downtrend line.

New 52-week lows came way down on Friday, and that is what we have to see to be optimistic about owning stocks, but this chart is a disappointment. Even with such a large decline, Friday's number of new lows was still way too elevated. 

The number of new 52-week lows, using only NYSE common stocks, looks significantly better than when one uses the entire NYSE exchange (which includes ETF and preferred shares). Also, the NYSE common-stock-only summation looks like it is getting ready to start to point higher. This chart definitely favors a new short-term uptrend starting soon.

The 10-day put-call ratio has turned higher after a number of days at the lows, so this chart also favors a new uptrend. Unfortunately, the common-stock only 10-day put-call ratio hasn't turned higher yet (not shown), and I think that is the more important chart. I would wait for it to confirm.

So some charts show signs that an uptrend may be ready to start, but here are the two charts keeping me mostly in cash.

A surging US dollar is not good for the global economy, and on Thursday, we had yet another break into higher levels. Finally, people on CNBC are talking about how damaging the strong US dollar can be. Currencies are really getting hurt, making it difficult to make payments on dollar-denominated obligations, along with the everyday inflationary impact.

It is surprising to talk about a soaring dollar and strong oil prices in the same article, but here it is. Energy stocks succumbed to selling recently, but so far it only looks like a pause in the trend. On Friday, many of the leading energy stocks looked poised to break higher, similar to the charts of oil shown below.

These are very bullish-looking oil charts, but what happens when they break out? It will probably be good for energy stocks, but what about everything else? Higher oil will probably lead to higher yields, and the combination of higher oil and higher yields is not good.

Bottom Line: I am a bear and I am unlikely to participate much if there is a rally next week. I am about 20% long mostly energy-related, and about 5% short via an inverse-European stock ETF. I am ready to buy back into short ETFs as they pull back in price.

Outlook Summary

  • The short-term trend is down for stock prices as of April 8.
  • 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).

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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