The Short-Term Market Downtrend Continues

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The short-term market downtrend continues. The Aug. 19 sell signal was a good one, and the PMO index turned red early last week, confirming the downtrend signal. Now the PMO is very close to the bottom of its range, which signals that the best time to take partial profits and raise cash has passed. Selling that occurs now is going to be more about repositioning portfolios to be more defensive for the difficult couple of months ahead for stocks.

Thursday was a strong day for stocks prior to Powell's speech. On CNBC, they were discussing whether Fed policy was ready to accommodate higher stock prices. I think it turns out that people were just cautious on Thursday, and they covered shorts going into a Fed-related event.

Friday's selloff started with repositioning back into short positions and then a continuation of the downtrend. Yet there weren't any buyers for the dip, so the selling accelerated.

This chart helps illustrate the short-term trends, and it shows how the peaks and troughs of the SPX correspond to the highs and lows of the PMO index. With the PMO near its lows, ordinarily I would say that we need to start to look for signs of the next short-term uptrend in a couple weeks.

But after the big rally in July-August, Powell's negative comments, and the market pointed decisively lower, it is hard to imagine what to do with our accounts in September and October. I suspect that it will be one of those periods of time where it is too late to short stocks and too early to buy them.

The bullish percents are pointing lower, but they are moving slowly. Compare the current period to mid-June, when these indexes dropped sharply. I suspect that next week we'll start to see sharper declines, but for now, they have the look that indicates a normal and expected pullback in stock prices.

They say to invest in the direction of junk bonds, and this chart helps to see just why they say that. I don't know who "they" are, but they are right. Too bad I didn't follow junk bonds back into the market in mid-July. Two weeks ago, this chart started giving signals that it was time to take profits and move back to cash.

This chart helps to see the August uptrend as a counter-trend rally off a bullish June-July base which was helped by an oversold market that was way below its downtrend line. It certainly looks like the larger downtrend has now resumed.

This chart shows a lot of new lows over the last five trading days. However, even though these are elevated levels, they are not alarmingly high. Also, it is good news that the number of new lows didn't start to rise until the market was already signaling a new downtrend. 

The price of oil broke above its short-term downtrend last week. It hasn't moved much yet, so I won't make too much of it. But if it trends higher, well, you know what happens; yields rise, technology stocks sell off, etc. So this chart could start to work against stocks for the most part, but it appears to be just sideways price movement so far.

Apple broke its clean uptrend at resistance. There has been talk of a double-top price pattern, and this is definitely worth keeping an eye on. The general market isn't moving significantly higher or lower without participation from this stock.

This is the SPX since the start of the COVID-19 pandemic in early 2020. What a rally. Now we must watch to see if the SPX challenges the June lows. If it does reach down that far, we will watch to see if it can hold above that level.

I'm short the small-caps, and this chart is the reason why. To me, this is a very bearish-looking chart.

I'm a bear. I don't think it is a good idea to own many stocks at the moment for either the short-term or the long-term. However, the sharp rally in August humbled me a bit, and I was a lot less sure of my bearish point-of-view on Thursday evening than I am now. So, going forward, I will need to remember just how powerful bear market rallies can be. I suspect that I'll remember this most recent bear market rally for years.

Bottom line: I have a good deal of cash and large positions that are short Europe, short small-caps, and short the SPX. I have a number of very small long positions in my favorite stocks which I will add to during oversold market conditions.

When investors start moving money to 30-year bonds, and yields peak and then turn lower, you know that there is investor acknowledgment of the need for caution. Discussions about what the Fed will do and where stock prices will go are all interesting, but I think the best thing to do is to look for market signals showing up in the charts - much like this one.

This certainly has the look of a head-and-shoulder top for the 30-year yield. I'm thinking that when the 30-year yield tops, we are near the halfway point into the bear market for stocks. That doesn't sound too bad, except that I'm guessing the scary months of the bear market are still ahead of us.

Several weeks ago, I was looking at this chart to remind myself that stocks don't go straight up forever, and that there are always opportunities around the corner to buy when the market is weak. Now, after Friday's carnage, I'm looking at this chart to remind myself that when stocks are down in price, if I'm patient and thoughtful, I'll figure out when to buy in order to take advantage of the next rally in stock prices.


Outlook Summary

  • The short-term trend is down for stock prices as of Aug. 19.
  • The economy is at risk of recession as of March 2022.
  • The medium-term trend is uncertain for treasury bond prices as of Aug. 13.

More By This Author:

A New Short-Term Downtrend May Have Started On Friday
Still In A Short-Term Uptrend
The Short-Term Uptrend Continues After Upside Acceleration

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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