The Short-Term Trend

The short-term downtrend (or sideways consolidation) continues. The past four trading days were typical of a weak market in which the sessions opened strong, but then lost strength during the rest of the day. The sessions were a bit weak, but it was actually just that stocks couldn't hold onto gains and closed with small price declines.

I saw very few stocks that actually indicated sell signals in which prices sliced lower on higher volume. With that in mind, it seems to me that the market is simply pausing as it gathers strength before the next move higher.

If you are new to this blog, I should point out that I view the market as traveling up-and-down within cycles of short-term trends that are fairly consistent within a larger bullish uptrend. There are generally at least 6 or 7 very good short-term opportunities to buy stocks each year, as shown by the stochastic in the chart below.

Taking advantage of the short-term buying opportunities sounds easy, but it really easy isn't. At the lows of the stochastic, you have to have the courage to buy when your emotions urge you to sell. Just as hard to do is aiming to capture partial-profits and raise cash into market strength when the stochastic is at the highs. But you have to do this so that you have the money to pay for your future purchases when the market inevitably reaches the next short-term low.

The chart below indicates to me that it is time to start deploying cash again, or at start least thinking about it. It's too late to be selling. Even if one of your stocks triggers a strong sell signal, at this point in the short-term cycle I would be more inclined to exchange that poorly performing stock for a new leading stock rather than selling in order to raise cash.

I should also point out that the chart below presents an unusual combination of a stochastic, near-the-bottom range and a price pattern moving sideways with a slight upward bias. That's unusual and deserves some thought. Does this indicate a very strong stock market that is ready to burst higher? Or does it indicate that the most recent market consolidation didn't purge enough of the bullish sentiment from investors, and perhaps that next short-term uptrend will disappoint?

I'm assuming the former, and that the market is ready for a strong move higher, but I'm also going to stay open to the possibility that I'm wrong and that I'll need to change tactics quickly if needed. Most importantly, I won't stubbornly try to hold onto a point of view that is wrong just because I don't want to admit a mistake. 

I've been watching the 10-year yield carefully because I have been worried about the impact of rising rates on stock prices. On Thursday it looked like yields wanted to break the uptrend and start to head lower. In my opinion, if the 10-year yield breaks out above 1%, then it is a significant risk to the market, particularly with so much bullish investor sentiment at the moment.

Outlook Summary

• The short-term trend is down for stock prices as of December 11.
• Contrarian sentiment is unfavorable for stock prices as of November 14.
• The economy is in expansion as of September 19.
• The medium-term trend for treasury bonds is down as of October 10 (prices lower, yields higher).