The short-term, buy-the-dip strategy that I like to use is a mess right now with the SPX and the NDX indexes out of sync, and the overall market unable to rally or sell off. The Institutional Stock Index provides a good look at the current trend. This index is trapped under its 20-day moving average but holding nicely above the trading range of the previous selloff in March. This is not the look of an index offering up the best opportunity to buy stocks, but then again, with this kind of choppy, unpredictable behavior, the market could be base-building in order to provide us with the next rally. 

I've had two bad calls in a row in which I thought a short-term uptrend was beginning. 

After the May 7 failed rally, I went to 100% cash in my trading account, but also I raised a lot of cash in the longer-term accounts because I was unhappy with the performance in these accounts. 

It turned out that the selling after the May 7 failed rally was just more sideways chop that was needed for a few days in order work off excessive bullish complacency, and to push people like me into cash. Looking back, in a way, I am happy about this failed rally because it gave me the opportunity to take a fresh look at what stocks should be in the longer-term accounts, and now I have re-deployed most of the cash. At the moment I'm happier with the current mix because it will be in a better position to benefit from rising inflation, rising yields, and most importantly, slower overall price appreciation.

The May 14 failed rally seems to me to be more of the same choppy pattern needed to push people to cash and dash their hopes that the market will resume its strong uptrend. When the market looked so bad on Tuesday afternoon, I started raising cash again, but most of it in the trading account. I left the longer-term accounts alone because I had more conviction that these were the right stocks to own even if the overall market doesn't perform well.

So where does that leave me? Wednesday turned out to be a classic bottoming trading pattern with the overall market oversold (as shown by the PMO index below), a very weak opening, but a very strong close. Thursday was mostly an upside follow-through, but then Friday was a bearish day with a strong-open, weak close. My trading account is now very concentrated in just a few stocks that look poised to break out higher and just need the tailwind of a short-term market uptrend that can last for at least a couple weeks.

That is a lot of trading activity for me, and I don't like it, but occasionally necessary. I'm very happy to own far fewer stocks, and have holdings that are better positioned for the current market environment.

This is a chart of the cumulative advance/declines for the NYSE common stocks. It has been such a consistent rise off the March 2020 low, with the only break in the weeks before the November election. The momentum indicators are near their highs so we obviously need to be prepared for a less favorable period for price appreciation. 

What else? If the market isn't going to trend higher then we need to know it isn't planning a serious selloff, and to do that I think the best place to look is at the number of new 52-week lows. At the moment, the level of new lows is non-threatening (terminology borrowed from Mike Burk, see link below). While new lows are at a non-threatening level it is safer to own stocks, in my opinion. But if they spike higher, get defensive.

Another indicator to watch is sentiment, and this is my favorite poll. In general, from a contrarian point-of-view, when the percent of bulls dips below 50%, the potential for a nice stock market rally increases. So, with the percent of bulls near 55%, I would expect the market to continue to chop around sideways.

It is hard to find areas of the market that are a bargain right now because just about every industry has been participating. The gold-miners have the only bargain-looking chart where momentum is turning up from a low level. I certainly like this chart.

Side note: there has been a lot of discussion on CNBC about inflation, deflation, the gold miners and the 10Y yield. Most people are concerned about inflationary forces, but some people are suggesting that a huge spike in the CPI and huge monetary and fiscal stimulus can't inspire higher long-term rates... and that the depressed miners are additional proof. I tend to agree with the deflation argument which means that rising inflation is probably a temporary problem and that the real issue is deflation. I think this means that after the economy starts to cool down, technology and growth stocks will again be the leaders.

Outlook Summary

The short-term trend is don't know for stock prices. 

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). 

Strategy During a Bull Market

• Buy large-cap stocks and ETFs at the lows of the longer-term market trends
• Buy small-cap growth stocks on breaks to new highs in the early stages of market trends
• Reduce buying when the market trend is at the top of the range
• Take partial profits when the market uptrend starts to struggle at the highs

Trader Discipline

• Don't be afraid of corrections because they are opportunities
• Never invest based on personal politics
• Take pride in sticking to the trading plan
• Don't give in to fear, greed, or anger