The Short-Term Trend Is Uncertain, But Stocks Are Showing Momentum

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I'm still not certain about the short-term trend in the markets, although by looking at the chart below, I can see that most stocks are now showing bullish, upward momentum. Although the PMO index has been choppy and reluctant to move higher over the last four weeks, it is now definitely trending upwards, and the momentum indicator in the bottom panel has started to curl upwards as well.

The major indexes still look good based on this chart, despite some bad sessions this past week. All three of the major cap-weighted indexes are above their 20-day averages, and the 20-day averages are all alligned above the 50-day averages. This is a bullish indicator.

The two bullish percents of the major exchanges are also now pointing upwards, meaning that an increasing number of stocks are showing buy signals based on their price patterns.

So, what's the problem? 

It was the leading technology stocks within the major averages that pushed the indexes to new highs, but now these leading stocks are starting to falter a bit while the rest of the market is showing improvement. In other words, we may start to see the major indexes decline while the majority of stocks gradually increase in price.

The weakness in the leading technology stocks can be seen in the weakness of the NDX Summation Index, which is now pointing lower.

Bottom Line

The short-term trend is out-of-sync and is messing with my trading style.

The leading technology stocks are extended and seem ready for a price consolidation after dramatic moves higher so far this year. But the broader market has been consolidating for most of this year, and it seems about ready to push higher again. I find this out-of-sync condition confusing, so I started trimming technology on Friday to deploy the cash into the broader market in the coming week if the conditions are right.

I have about 15% cash at the moment.

Meanwhile, there were several negative inflation reports this past week which helped push up yields in the longer-duration Treasuries. These yields are now far enough above their 10-week averages that I decided to flip the medium-term trend of bond prices from up to down (yields up, prices down). Rising yields work against technology stock prices, which should help to at least partially explain why leading stocks were wobbly this past week.

This is a random chart that I found in one of my old chartlists, but I thought it was an interesting look at the longer-term trend of the market. So, I updated it with a red resistance line to show that it has broken out and strongly favors higher prices for stocks longer-term.

I mentioned that the inflation data was a bit negative this past week, but from what I read it wasn't as big of a deal as many headlines suggested.

There are many components of inflation, such as housing and wages, but in my experience inflation really becomes an issue when commodity prices are rising too high and too quickly. But from the chart shown below, we aren't seeing commodities as an inflation problem so far, and that makes me optimistic about future inflation concerns.

The real culprit among commodities is the price of energy, and specifically oil prices. This chart does have me a bit concerned because it looks like oil prices could be headed higher, but the current price for Texas crude is still below the important $80 level. Until the price breaks above $80, I won't get too concerned.

Technology stocks struggled this past week, but they are still well within an excellent uptrend.

One area of the market starting to show signs of life is health care. The chart below shows a nice-looking emergence above significant longer-term resistance. This is looking good to me.

I like the looks of this chart, too. Transportation has also been breaking out above significant resistance.

The Defense stocks haven't broken out yet, but they appear to be getting close.

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 November 2023 (yields up, prices down).

More By This Author:

Leading Stocks Are In A Short-Term Uptrend
Stocks Are Still Correcting And Consolidating
Stocks Are Still In Correction Mode

Disclaimer: I am not a registered investment advisor. I am a private investor and blogger. The comments below reflect my view of the market and indicate what I am doing with my own accounts. The ...

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