Short-Term Downtrend Continues
The short-term downtrend continues, and it is still a bit too early to be looking for the next uptrend because the market usually needs to hang around near the bottom of the range for a while before it can move back into an uptrend.
Based on the not-too-hot-or-cold jobs number Friday morning, I covered my shorts and added to longs in some of my growth stocks. Looking back, I think covering shorts was reasonable, but it was premature to add to longs based on my own trading plan.
When the PMO is at the bottom of the range, I think there is a green light to cover shorts. But adding to longs should be done only when the market signals that it is bottoming out short-term.
My eagerness to get long is because we have the favorable fall/winter trading approaching, and it appears to me that the weak, muddle-along economy will probably continue.
I'm still in shock (and financial pain) regarding the big growth stock sell-off that started Sept. 9, but I am still operating under the belief that these are the stocks that will do best while the economy is able to limp higher.
I am still trying to learn how to count distribution days. If the current short-term downtrend started Sept. 25, then there really wasn't a lot of distribution on the SPX leading up to it based on the chart below. So, it seems to me that the three most recent distribution days are a part of the process that clears the way to the next short-term uptrend.
It was pointed out by IBD yesterday that the Thursday and Friday rallies were both on lighter volume. Their view is that when the market is ready to push higher off the lows, the turn upwards should include a level of volume that shows some enthusiasm. So I think this means that the market downtrend (or consolidation) continues at least into the coming week.
Moving on to the medium-term trend.
For a long time, I only paid attention to (1) the short-term trend and (2) the long-term economic outlook, and I am often tempted to go back to that system because it is so simple.
I got drawn into tracking the medium-term trend because I realized over time that the medium-term trend had a significant impact on the strength of the short-term trend. In other words, if the medium-term trends lower, then any short-term rallies are likely to be weak.
I am still struggling a bit to define the medium-term, but here are two charts below that I have been using. The first chart shows the narrow S&P 500 which indicates strength, and the second chart shows the broader S&P 1500 which reveals significant market weakness starting in August.
These charts indicate to me that if you own large-cap leaders then you have market strength supporting your holdings while most other stocks will be faced with the headwinds of a weak market.
The longer-term outlook?
I said last week that if the ECRI index pops up above the zero-level, then I would have to upgrade the outlook. Well, the ECRI is now above zero. I am reluctant but here it goes.
The long-term outlook has now been upgraded from caution to "weak-growth". Keep in mind, this is a long-term general outlook primarily based on the strength of the economy and not specifically about the stock market. But the assumption is that as long as the economy grows, then eventually stock prices will move higher as well. In other words, stocks can continue to struggle for now but at some point they will trend upwards as long as the economy moves higher.
What will happen with bond prices? It looks like they continue to be strong (prices higher, yields lower).
Here is my Relative Strength spreadsheet.
Lot's of weakness showing here, but that's what you would expect to see. Bonds are the leaders and Small Caps are the laggards, not good. However, the large-caps are still skewed right of center which is favorable.
Among the sectors, the leaders are all defensive and that now includes Technology which plays both offense and defense. Still, just like the large-caps, the important sectors are still skewed right of center.
Outlook Summary
The long-term outlook is weak-growth as of Oct. 5.
The medium-term trend is up as of Sept. 4.
The short-term trend is down as of Sept. 25.
The medium-term trend for the price of bonds is up as of Nov. 16 (prices higher, yields lower).
Investing Themes:
Large-Caps, Home Building, Defense, Utilities, Water, Dividend-Payers, Insurance, Semiconductors,Consumer Goods
Strategy During a Bull Market:
- Buy large-cap stocks and ETFs at the lows of the medium or short-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
- The cardinal rule is never invest based on personal politics because the stock market can do well regardless of which political party is in control
Disclaimer: I am not a registered investment advisor. My comments above reflect my view of the market, and what I am doing with my accounts. The analysis is not a recommendation to buy, ...
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