Image Source: The SPX cap-weighted index has continued to respect its uptrend line and its short-term horizontal support. The chart really doesn’t look bad at all despite considerable market weakness being revealed by other market indicators, such as the number of NYSE 52-week lows shown in the lower panel.The PMO Index has been doing its job very nicely by showing how the majority of stocks move together in short-term cycles. At the moment, the market appears to be in a short-term downtrend. As the PMO approaches the low of its range, it becomes less risky to deploy available cash and buy into weakness. Deploying cash into market weakness may sound easy to do, but when the opportunity is actually presented, it can be difficult because of the fear that the market will continue to fall.These bullish percent indexes of the two major exchanges are confirming the underlying market weakness shown in the PMO Index. It is curious that the NYSE BP started to weaken two weeks ago, but the Nasdaq BP didn’t really weaken until just this past Friday.This next chart does a good job showing how the short-term trend peaked early December and has accelerated to the downside recently. There were a lot of new 52-week lows on Friday. More about this later.These summation indexes seem to be confirming the market’s downtrend.Should we buy into the market as prices pull back during these brief short-term downtrends? In other words, is the underlying bull market healthy enough for us to buy more stock in anticipation of the next short-term uptrend? In order to help make this judgment, I like to look at the chart of the junk bond ETF ().Other than a brief sell-off in early August, this chart has looked good for a number of months. However, Thursday and Friday were bad days for this ETF, but so far not bad enough to be too concerned. I’ll be watching this chart closely next week for further signs of weakness. Weak junk bond prices usually translate into stock market weakness,As mentioned, NYSE new 52-week lows are elevated and saw a scary spike on Friday. The previous Friday there was also a bit of a spike, and that was concerning because it occurred while the PMO was near the top of its range, which I interpret very negatively for the general market.This Friday’s spike in new lows was quite elevated, although it occurred with the PMO near the bottom of its range, which is when you would expect to see elevated levels of new lows. Technology performed fairly well this past week, and, in fact, the semiconductors had a decent rally on Friday while the other market sectors were weak. I believe this minor semiconductor rally is a defensive move in which semiconductor stocks are perceived as a bit safer to own because prices have fallen so far over the last few months.Despite Friday’s bit of strength, I still see the weak semiconductor group as a major sign of weakness for the general market. This is one of the market’s most important sectors, and it has been noticeably weak.The weekly chart of the semiconductors looks a bit better than the daily chart above. The group looks to me like it could go either way, but there is a bit of strength showing, demonstrated by the fact that it hasn’t had a solid close under the uptrend line.Treasury yields moved upwards for most of last week due to disappointing inflation readings, and these higher yields put added pressure on stock prices to move lower. The move in yields rang alarm bells because it was a sharp move, even though all three of these yields shown are below very recent highs. If yields exceed the November highs, then we are likely to see even weaker stock prices.Bullish sentiment has pulled back considerably from what was seen just a few weeks ago, and this is good news for stock prices. However, of course, I would much rather see sentiment reaching down into the level of fear. I think sentiment is still too high.
Bottom Line
The PMO Index is nearing the bottom of its range, and it is when that happens that I start to look for buying opportunities. But I’m too nervous to be a buyer because there are some indicators flashing stock market warning signs, and I think the warnings are serious enough that I’ll be trimming my holdings on Monday.
Outlook Summary
The short-term trend is down for stock prices as of Dec. 6
The ECRI Weekly Leading Index points to economic recovery as of July 2023
The medium-term trend is up for Treasury bond prices (yields down, prices up)
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