The downtrend happened so quickly this week that this PMO Index wasn't able to react quickly enough to be useful. Usually you'll see at least a red bar or two before the downtrend begins, but the Tuesday sell off came without any signal of weakness in this chart.

However, I think this index is still useful during this period of high volatility because it tells you where most stocks are in the cycle. So at least we know that when the PMO is at the top of the cycle, the best short-term buying opportunity is past. Also, at the top of the cycle, it might be a good time to do some selling if you want.

I still own a number of stocks, but the dollar amount of each stock is small. Instead of selling these stocks, I decided to hedge the portfolio with inverse funds. It has worked out okay, but it isn't my best work. The reason is that it is really hard to know the best time to buy and sell inverse funds. Or, maybe I should say that I am not good at it, and to be honest I don't really like trying to short the market because downtrends are volatile and require quick thinking which isn't my strength.

So now that I own these inverse funds, I need to decide what to do with them. Should I be thinking about selling in order to realize the gains (profit), or should I hold them to prevent large downside loses in case of another serious leg lower for stocks (insurance)? Somebody tell me because I really don't know.

One thought is to hold them for profit if the market breaks down from Friday's low. I can hold them as long as the market trades below this level, and then sell for profit when the stochastic is oversold.

Another thought is to hold them as insurance while the market remains below Friday's trading range high. And, then sell them if the market breaks above this level because the insurance is no longer needed.

The Long-Term Outlook

How weak is this market? Are we just in a soft patch or is a big downside move brewing? Here are my two best guesses.

One, the US economy is weak, but not recession weak. In that case, I think the US stock market revisits the 2018 lows, and, at least for awhile, it remains there. At least until there is some clarity.

Two, the US economy follows the world economies into recession-level weakness. In this scenario, the market breaks below the 2018 lows, and the next downside target is where stocks touched the former trend line in October 2018, which was during the Presidential election. That's a big drop. I would sure like to have some inverse funds if stocks drop to that level.

Small Caps might be leading this market. They have already undercut the lows of this October and are very close to touching the lows of February. The good news though is that small caps have a very nice level of horizontal support mid way between the current level and the October-2016 level.

The ECRI Index has leveled-off in recent weeks finding support above the critical level of -5 where real economic damage begins. My view is that as long as this ECRI index holds above -5, then there is at least a chance that a major bear market is avoidable... or, in other words, if the ECRI index falls below -5, a bear market is very likely.

One way to remove any judgment or decision-making is to just follow your indicators. You could, for instance, just avoid stocks while both of these indicators in the chart below are less than zero (such as now). I'm tempted.

Outlook Summary:
The long-term outlook is negative and continues to weaken. The medium-term trend is down as of Oct-4. The short-term trend is down as of Tuesday Dec-4. It is too uncertain. Step aside.

The medium-term trend for bond prices is up as of Nov-16 (prices higher, yields lower).

Investing Themes:

Cash
Inverse Funds

Strategy During a Bull Market:

• Buy large cap stocks and ETFs at the lows of the medium or short-term trends.
• Buy small cap growth stocks on breaks to new highs in the early stages of short-term up trends.
• Stop buying when the short-term trend is at the top of the range.
• Take partial profits when the uptrend starts to struggle at the highs.
• Never invest based on personal politics.