Image Source: Pixabay

The short-term uptrend appears set to continue, and the duration of this cycle, as shown by the PMO index in the chart below, is at a point that suggests some caution. However, the uptrend actually seems to be strengthening by luring more traders and investors into stocks, so it seems there is a good chance that the rally will continue a bit longer -- maybe even until the end of the year. Friday's rally for the small-caps was particularly encouraging.

Because this short-term uptrend has lasted for a solid month, it means that we need to be looking for signs of weakness that could indicate the start of the next short-term downtrend. The first place to look is at the five-day moving average for the major stock indexes.

Based on the chart below, the NDX has weakened, with intra-day trading below its five-day, but session closes at or above. Really nice price behavior has rotated from the NDX to the SPX and the Dow, which showed strength towards the end of the week.

The bullish percents are often used to gauge the breadth and depth of the market. In other words, these two indicators are used to see how many stocks are issuing buy signals and in which direction the trend is pointed. After a couple of weeks of ticking higher in a bullish fashion, both indicators are pointing decisively higher. This is a bullish indicator.

This is another chart that helps to show how many stocks are participating in the rally. The top panel shows the SPX bullishly near or above a new high, and the middle and bottom panels show how many stocks are participating.

These two indicators show that the rally is pulling lagging stocks higher. This is a bullish chart, but it also shows that the indicators are near the highs established in July. That is another sign that it is time to be cautious and to look for the subtle signs of weakness that the market shows when it peaks and transitions from a short-term uptrend to a downtrend.

The momentum indicators of the advance/decline line have been working well as buy/sell indicators. When this KST indicator crosses under its red moving average, it will be a signal to protect capital by taking partial profits and raising cash.

The next chart helps us to know how much cash to raise when we do see the next short-term downtrend beginning. Should we raise by 25% or by 75%? There are several factors to consider, but one big factor is how significant and deep we think the next downward cycle will be. To help with this, I often look at the chart of this junk bond ETF.

These junk bonds are issued mostly by less financially secure companies, and they often pay a higher yield than the top-quality corporate bonds. The thinking is that if the bonds of the less secure companies are rallying higher in price, then it is a sign of rising confidence in the ability of these to perform well.

So, if I see junk bonds showing strength, I'll raise less cash near the short-term stock market cycle peaks, and if I see junk bonds showing weakness, I'll raise more cash at the stock market cycle peaks. At the moment, this chart is telling me good things are happening behind the scenes in the market, so I should be raising less cash.

The number of new 52-week lows performs a similar function as the junk bond ETF price. If there are a lot new lows, I'm more cautious, and vice versa. At the moment, the number of new lows on the NYSE is at harmless levels. In other words, the top panel of this chart is bullish and favors owning stocks through the normal ups and downs of the market.

On the other hand, the number of Nasdaq new 52-week lows is elevated, although not as badly as it was in early November. I don't like it, but I recognize that the NYSE new lows are much more important to the overall health of stocks than the Nasdaq.

All the talk about a recession next year has me nervous, but they said the same thing last December, so I'm going to stick with my own charts for guidance. My favorite recession-related indicator is this weekly leading index from the ECRI, and at the moment this index is above zero, which points to growth, and it is pointing higher. This tells me that the economy is performing well enough that it favors higher stock prices.

Bottom Line

I am about 75% long stocks, and the rest is in cash. I am cautious due to the duration of the short-term cycle, but I am also acknowledging that the market seemed to be gaining strength towards the end of the week, which means the short-term cycle could continue to push higher for several more weeks. I will be adding selectively to positions showing strength while looking for opportunities to trim either extended or underperforming positions.

Shares of gold miners came to life this past week, and I added several positions to my accounts. I would never be a long-term holder of gold stocks, but I like to play them as a trade because they can really rally at times. 

My favorite gold indicator is this silver/gold ratio. When it is rising, the gold miners often show strong rallies, too. At the moment, the ratio and miners are pointing higher, which I think is bullish for gold miner stocks.

Here is a monthly chart of the metal. If it was a stock, I'd be a strong buyer.

I follow the package company Index because it can perhaps serve as a barometer of the economy. When it rallies like this, I can't help but think good things lie ahead for stocks in general.

This steel ETF is breaking to new highs, and the chart is very bullish-looking, similar to gold. I certainly like the looks of this.

The net new high-low ratio is a good indicator to keep you in or out of stocks at the right time on a longer-term basis. I wish I had paid more attention in September, when it crossed under for an intermediate-term sell signal. Sometimes the signals aren't that great, such as the April to June period, but for the most part, this is a good indicator to follow.

I will occasionally show this chart to emphasize how the market moves in short-term cycles. Of course, this year the short-term cycle got a bit out-of-whack with a lot of choppy behavior during the middle of the year, so it doesn't always work perfectly.

The point of the chart is to show that whenever the PMO index is at the top of the range, you can be 100% certain that within a few weeks, maybe months, it will once again be at the bottom of the range, and vice versa. This means that we need to keep to the strategy of taking our profits when the PMO is at the top of the range so that we don't give too much of the profits away when the index inevitably moves to the bottom of the range.

Plus, by raising cash at the top of the range, we have the cash available to deploy back into stocks when the PMO is at the bottom of the range.

Outlook Summary

• The short-term trend is up for stock prices as of Nov. 2.
• The ECRI Weekly Leading Index points to economic recovery as of July 2023.
• The medium-term trend is up for Treasury bond prices as of November 2023 (yields down, prices up).

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