The Short-Term Uptrend Continues In A Wobbly Market

The short-term uptrend continues, although there are a few signs that the broader market is getting a little wobbly, such as the red candle shown in the PMO index below. This chart has the look of an index rolling over and if it continues lower early next week, then the major market indexes will probably follow it lower. At the moment, however, I don't think you can declare a downtrend because there are still some nice-looking charts.

Except for the poor session on Wednesday, the major indexes had a good week, and with strong closes on Thursday and Friday.

The NDX really looked strong this past week. This is a very good chart and it is hard to be skeptical of the general stock market when it is being led higher by the NDX looking like this. This appears very bullish.

My favorite group, the semiconductors, has come back to life. We have a really good-looking chart here.

Healthcare is starting to look like a new leader. I will concede that this is a defensive group, but for the time being, this strength is a plus overall.

Okay, I think I have made the case that the market looks healthy, but I did show in the first chart that the PMO index is starting to roll over. Also, the SPX equal-weight looks like it has already rolled over.

The bullish percents show just a bit of hesitation. Not enough to start a downtrend, but enough to help point out that the momentum in the broader market is weakening a bit and that there is a little less upward momentum.

The stochastic of the inverted VIX is pointing lower, and this is happening while the major indexes hit new highs, which is a short-term negative divergence.

Junk bonds are weak and this is a negative for stocks, but the price may be stabilizing. This chart does worry me a bit.

Quite the sideways consolidation for this ETF of small-caps. I don't know that this chart says too much about the health of the broader market. 

The CRB commodity index has people very worried about inflation, and inflation leads to rising rates, and rising rates hurts stocks, etc. But strong commodities generally indicate economic activity and strong commodity stocks. So, right now, I'm calling it a plus.

Bottom Line: I really like the strength in the NDX, semiconductors, and healthcare. The charts show a strong stock market, but also some early signs of weakening participation and momentum short-term. I have about 10% cash. 

Yields weakened a bit this past week, which is probably one reason why we saw such a strong NDX.

With the percentage of bulls at only 49%, sentiment continues to favor higher stock prices from a contrarian point of view. Also, seasonality is very favorable for higher stock prices.

The tick higher in the ECRI index shown below supports economic activity three to six months into the future, which is also favorable for higher stock prices. This index does a good job of predicting economic activity, and I'm a big fan of Lakshman Achuthan and his balanced approach to looking at the economy. Lakshman is definitely one of the adults in the room.

I'm really liking this tweet. It reminds me to just admit when I am wrong, calmly and easily, because then I am able to move on. And if I move on, then I'll be more likely to get it right the next time. It isn't about being right, it is about making money. And if you aren't making money, then there really is no point in doing this.

Outlook Summary

  • The short-term trend is up for stock prices as of Oct. 8. 
  • The economy is in expansion as of Sept. 19, 2020.
  • The medium-term trend is down for treasury bond prices as of Sept. 23 (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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