A Shift In Focus

The short-term uptrend continues and now the PMO index has reversed back up to the top of its range in a pattern that looks quite similar to the previous uptrend in November. I think this reversal reflects this past week's shift in focus from the inflation-sensitive sectors such as miners to growth laggards such as technology. This sector rotation indicates to me that it is time to restrain from new purchases and focus on capturing partial profits and raising cash into strength. The reason I like to look at the PMO index is that it helps me to know when to sell into short-term strength, and then, weeks later, buy into short-term weakness.


The major indexes had strong performances this past week. Wednesday's market struggled in the morning but turned around in the afternoon as buyers stepped in, and it was definitely bullish market action. Traders took profits into the close on Friday so next week will start off on a slightly hesitant note.

The bullish percents continue to push higher and up to levels above the November highs. This chart certainly looks favorable for stocks.

This junk bond ETF remains in a strong uptrend, but it hardly moved for the week. I continue to believe that when and if the bear market is ready to re-assert itself, one of the first indications will be seen in this chart. If the ETF drops down below the dashed blue line, I will be selling stocks.


The VIX continues to close at low levels indicating a lack of volatility which is bullish in my opinion. Not everyone shares that view. In CNBC I hear people suggesting that they would rather wait for the next spike before buying stocks, but I don't agree with this thinking. The December sell-off in stocks showed very little movement in the VIX and this was a hint that the January rally would be significant.


New 52-week lows are at harmless levels. I can't overemphasize the importance of this in my trading. Harmless levels of new lows is a requirement in my opinion to own and hold stocks.


Last week I showed the new lows coming out of the 2008-2009 bear market. This chart shows new lows coming out of the sell-off in late 2019. The behavior of the new lows is the same in both periods of time. When new lows drop down to harmless levels it is a very good signal and favors higher stock prices. Does it mean that the current bear is over because new lows are at harmless levels? I'm not sure, but I do know for sure that for now, it favors higher prices.


SPX price action shows a lower low in October, a lower high in November, but then a higher low in December. So now, although the price pattern is still choppy and hesitant, it looks like there is a good chance that the SPX will push up above the November high to confirm a bullish inverted head and shoulders. The short-term price momentum shown in the lower panel continues to favor higher prices although it isn't as robust as I would expect if the inverted head and shoulders were really signaling a major bottom for the index. But maybe I am nitpicking?


Here is a look at the SPX. The top panel shows a bullish ascending triangle price pattern, but it isn't supported by the bottom panel showing weak on-balance volume. I think you need a better-looking on-balance volume indicator if a bear market is going to transition into a bull.


Here is a look at the bullish market reversal that occurred in January 2019. The price pattern pushed higher without much choppiness and the on-balance volume did the same. This is in contrast to what we are seeing now shown in the chart above with weak on-balance volume.


If you follow the price action of the short-term trends as I do, you have to know when to start raising cash to lock in profits so that you have enough available cash to buy when the short-term cycle is near its lows as indicated by the PMO index in the very first chart shown. Of all the charts I have in my chartlists, this is the one that is giving me the best signal that now is the time to start to take your profits rather than focusing on what to buy next. The NYSE common stock-only summation index is getting near its former highs. Of course, this index could be early and you might end up missing some of the potential profits, but I don't let that bother me because I don't know of a better way to manage risk and make consistent profits in my accounts.


There is a lot of talk on CNBC about buying energy stocks because profits have been so good and because balance sheets are so healthy. These people may be right, but I'm old and learned a long time ago that when a commodity starts to show price weakness, the associated stocks will soon show weakness too. For me, the less risky choice is to reduce exposure in this sector until the price of oil starts to close above the resistance area shown in the chart below. I will say, though, in defense of the energy bulls on CNBC, I've been negative on this group for a while and the CNBC bulls have been right, not me.


As I just mentioned, I'm old and I'm stuck in some of the lessons learned over the years. I find it really hard to believe in small caps right now even though the chart of small caps is looking a lot better. When the bear market is over, small caps will lead the market higher, but based on this chart, I see a rally back to resistance, but not leadership.

The chart above doesn't show leadership, or not yet at least, but this chart below does show early leadership in the most important group of stocks to the world economy. This chart is definitely a feather in the cap for the bulls.


Bottom Line:

I remain a bear although I certainly see the evidence of a lot of improvement in the market. I'm about 10% short stocks and about 65% long stocks after being as much as 90% long when the session opened Friday morning. Most of the remaining long holdings will probably be sold via stop orders. 

More By This Author:

The Short-Term Uptrend Continues With Large Price Swings
Last Week's Short-Term Uptrend Continues With Surprising Strength
A New Short-Term Uptrend May Have Started On Friday

Disclaimer: I am not a registered investment adviser. My comments reflect my view of the market, and what I am doing with my accounts. The analysis is not a recommendation to buy, sell, ...

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