Are we having an inflationary spurt that often appears late in a bull stock market?

The Short-Term

The stock market is really interesting right now. Is the market building for another strong move higher, or is it topping out and preparing for a correction? I think it is the latter, but I will just follow wherever it goes.

Predicting the market is really hard to do, and I don't have any special skills used to predict. My skills are better at following the market, and even that is difficult with all the whipsaws and news-driven trading.

At the moment, we are in a short-term up-trend that is beginning to falter a bit. If you didn't buy into this short-term trend on Monday, then you missed the opportunity. That kind of move is way too quick for me unless the longer-term trend offers a good set up such as it did just before the election.

This chart below will be a good one to watch to see how the short-term trend holds up. The PMO index is updated after the close each day, but the bullish percents are updated during the session which helps when you try to adjust positions in the final hour.

Here is another chart to watch. The moving averages are set up for more downside price action if the 50-day doesn't hold. And it would be tough to claim a medium-term up-trend if the NYSE index drops below its 50-day.

The Longer-Term Outlook

This chart continues to be favorable for higher prices longer-term, but with a couple of potential dark clouds developing.

Small caps are still above support and the up-trend line which favors stock prices. The overall stock market is almost always in good shape while small caps are performing well.

But the dark clouds are starting to be a worry.

First, the ECRI continues to tick lower, but from unsustainably high readings. If this index levels off soon then I think it would continue to favor stock prices in general. If it continues to dip lower at the current pace, then it would be time to start thinking about some defensive measures. Something like that.

My experience with this index is that the economy and stock prices might struggle as the index gets close to zero. But when the index dips below zero, a severe correction is a possibility. When the index dips below -5% then it is time to get out of the way because then there is the potential for a bear market.

Second, M2 growth has been trending lower for sometime, and in recent months the growth rate has been spiking up and down. It is hard to see this as a positive for stock prices. This is not an easy indicator to use when the pattern is choppy and looks like this, but I know for sure the market is better off when this rate-of-change is trending higher, not lower. This indicator does not favor higher stock prices at the moment.

There was someone on the FastMoney podcast a few weeks ago who was talking about the yield curve. He was trying to remind nervous investors that just about every serious economic downturn has started with an inverted curve, and that we are far from inversion at the moment.

I am not sure what to think about this although I certainly agree that inversion is bad news for stock prices. It also seems to me that we are in a deflationary era, but that we are having an inflationary spurt that often appears late in a bull stock market.

And if decades of low inflation has given way to deflation, then are the rules different regarding the yield curve?

Outlook

The weekly Value Line Investment Survey had this to say about the stock market. 

• Retail is weak, but offset by strong employment.
• Lost momentum in the economy, but leading indicators remain healthy
• International events are worrisome
• Earnings are excellent, but offset by very high PE ratios
• Caution. 35-45% cash and Treasuries

I would add to this that ... just about the time when you start to think a bull market will last forever is when it is near the end.

The long-term outlook is positive, but it is time to start getting cautious again.
The medium-term trend is down as of March 21
The short-term trend is up as of April-20