A new uptrend already? That was quick. A new short-term uptrend began on Friday, May 7, and I have now redeployed my available cash back into the market. Most of the purchases were among the stocks and ETFs that would benefit from inflation.

I should note, as I have for the last few weeks, that a new pattern has emerged in this PMO index that hasn't been seen for a long time. The index is unable to reach the top or the bottom of its range, and it is chopping around before it is ready to turn lower. This new pattern makes it a bit more difficult to buy the market dips and to know when to lighten up near the market highs.

The new short-term uptrend is confirmed by the SPX, which is above its five-day and is moving into a new high. 

I often mention that a new uptrend can't begin without the SPX above its five-day, and we saw that on Thursday with a very bullish close. Also, obviously, a downtrend is definitely over when the SPX hits a new high in bullish fashion, as it did on Friday. In addition, similar to the SPX, the Dow Industrials look particularly strong.

What about the Nasdaq? The weakness worries me, I don't like it. But I want to participate in this market, so for now I'm riding the uptrend by owning the NYSE stocks. Their strong price action is turning the short-term trend higher, but the Nasdaq weakness is narrowing total participation and we all know that narrowing participation often leads to market tops.

This is a convincing chart for the bulls and I should be showing it more often. The broader S&P-1500 index is into new highs, and so are both the cumulative advance-decline and cumulative up-down volume indexes.

In other words, the S&P-1500 price high is confirmed by two measures of market breadth which are also hitting new highs. I think if someone were to ask you to define a bull market, you could just show them this chart. But did someone say something about "narrowing participation?" I don't see it in this chart, not yet anyway.

Here is a look at the weekly version of the same chart. This shows a really good-looking period for the stock market off of the March 2020 lows and with confirmation from the breadth indicators. It is interesting to look back at the cliff that the market fell off in February 2020. There was a slight non-confirmation by the breadth indexes of the February 2020 price highs. 

I think we should be on the lookout for a similar non-confirmation by the S&P 1500 breadth indicators this year because, as the price chart of the Nasdaq shows us, it is starting to lag and isn't participating as it was earlier in the year.

In other words, as more NYSE stocks participate, fewer Nasdaq stocks participate, and at some point, NYSE participation will slow and reverse. When this happens, total participation will be declining and then we will know that the market is near its tipping point. I don't mean that the market will repeat the collapse of 2020, but with the market at such high levels, and with unusual stock price action, I worry that something is brewing that I won't like.

The non-confirmation by the breadth indicators in this chart is subtle and too easy to miss. Besides, when the market top is near, we'll be giddy and exhausted, not in the mood to hunt for subtle reminders that are hard to spot. What to do?

This is the chart that will save us. We need to be watching the number of new 52-week lows. This is a look back at early 2020. The bottom fell out of the market on Feb. 24. It was swift and sharp, and it didn't feel like there was a lot of warning (although Jim Crammer was telling us in a loud voice that this was about to happen). 

This chart shows how valuable and important it is to watch the level of new 52-week lows. Here is a loud and clear indication in January and February of 2020 that something bad was happening to stock prices behind the scenes, and this was hidden by the strength in the major indexes. So, my point is that we need to watch this chart to help make sure our money is safe in the stock market. This indicator isn't perfect, you still have to pay attention to other charts, but this is the most important one to watch, in my opinion.

What's happening now? The number of new 52-week lows for the NYSE is at harmless levels, but the number of new 52-week lows for the Nasdaq is elevated. If the number of new lows was elevated for both indexes, I'd be out of the market. But with just one index showing heightened risk, it's a judgment call.

What to conclude about the market? Obviously, if I'm going to be in stocks, I will focus primarily on the NYSE stocks, but, at the same time, I will be aware that overall market risk is higher than it was earlier this year, and be prepared for it.

Now I'm going full circle and showing another chart below of the PMO index. I like this chart because it is such a great reminder that the general market provides a number of opportunities to buy. 

One reason I am showing this is because I need to be reminded that it is so hard to resist buying breakouts that set up nicely on the stock chart but occur with the PMO at the top of the range. So often, when the PMO is at the top of the range, a beautiful breakout turns around and trades down below the breakout level as the market transitions to a short-term downtrend. 

Stock breakouts occurring with the PMO near the bottom of the range and just starting to move higher work out so much better for me because the stock has the momentum of the general market helping to push it higher. When the PMO turns higher off its low, it is opening a window, but the window is often only open briefly. So I need to jump through the window right when it opens because it can also close very quickly.

Another reason I am showing this chart is that I think it is more important than ever for me to stick with this strategy. If I deploy cash at the right time, then I am also focused and looking to raise cash at the right time. When market risk is low, then I can afford to make mistakes because the market is more likely to let me get away with it. But with market risk rising it becomes more important to be focused on executing trades correctly and according to plan.

In other words, buying and selling at the right time in the short-term cycle reduces risk to the portfolio.

One last point, in addition to all that is mentioned above, I am also trying to be better at letting stocks stop me out of positions. I used to just start to raise cash when the indicators told me to, but the indicators are less in sync at the moment and I think automatic stops might be the better strategy.

The bottom line is that my trading strategy is to buy near the PMO lows, and to raise cash using sell-stops near the PMO highs. I'll deploy the cash quickly to take advantage of the lower-risk buying opportunities, but also so that I can be focused on watching out for the risk of a market top.

Outlook Summary

• The short-term trend is up for stock prices as of May 7. Here is where there is a change in trends.
• Contrarian sentiment is unfavorable for stock prices as of Nov. 14.
• The economy is in expansion as of Sept. 19.
• The medium-term trend for treasury bonds is down as of Oct. 10 (prices lower, yields higher).