Excessive Bullishness Flushed Out

A new short-term uptrend began on May 7, and the PMO index has quickly moved to the top of its range. This is where I usually start to get cautious about any new purchases.

I should mention, though, that this new short-term uptrend started in the middle of the range, and that they usually start with the PMO at the bottom of the range. So this cycle could play out a bit differently than most of the others.

A new medium-term trend started May 10 as shown by the moving average cross. Of the ten major indexes I monitor, all of them have now had a positive, bullish cross.

In addition to the cross-overs, and this is probably more important, the number of new 52-week highs have increased to bullish levels while the new lows are down to harmless levels.

Plus, I like the setup in this chart. In January, the market ran up too high, so a lengthy period of correction or consolidation was needed before a healthy trend could resume. It looks like we had just about three months of correction which seems about right.

And one last comment for the bulls, the set up is also just right based on market sentiment. As mentioned in yesterday's post, the Newsletter Writer bulls are about 43% which is just where you want it to be when a new medium-term is starting. In other words, the sentiment survey confirms that the excessive bullishness has been flushed out.

What could go wrong with my bullish outlook? There is always the Mueller investigation, and I worry that one day there will be a headline that severely rocks the market.

In addition, it is very likely that the 10Y and 30Y Treasury yields will break out at some point soon, and I worry that this will cause Technology and Industrials to start heading lower again. Without leadership from these groups, I would expect the stock market to struggle.