Equity index indicator summary

A young stockbroker calls an elderly investor to have a chat….

“Well, Mrs. Smith, I thought I’d call to see if I could help you with some of your investment decisions while informing you that the Dow Jones Industrial Average is back above 10,000.”

The woman hesitates for a moment, then says, “Thank you for the call, but for your information my Dow is still back at 6500 because of all the financial stocks you had me buy back in late 2006 when you were helping me with my investment decisions then. In fact, I’ll be lucky if the Citicorp shares I bought near 50 will ever buy me a Big Mac!”

And so it is with many investors who, despite a powerful rally over the past year, may never see recovery in some of the stocks they have continued to hold in their portfolios. That kind of story is sad, even heartbreaking in some instances where investors were depending on stock portfolios for retirement. But the reality is nothing new.

Ever since the great Tulip Bulb Mania in Holland in the early 1600s, investors have continued to exhibit the herd instinct into major tops and major bottoms. Why? Because people like to feel comfortable with their investments they tend to do what other investors are doing because it “feels good” art the highs and they similarly panic into the lows. The 19th century British nobleman and scion to the Rothschild banking clan once said that "The time to buy is when there's blood in the streets." But how many unsophisticated investors have the acumen to buy equities, or any other investment vehicle for that matter, when economic conditions look disastrous, like at the March 2009 lows? Or sell into a major top, when they are quite content and the economic environment is placid? Like the 2007 peak or the 2000 highs? Not many. Thus the sad stories.

Which leaves us in the current environment. After nearly 13 months of a powerful uptrend we have once again begun to hear some folks suggesting that the stock market is really in good shape and that higher prices should follow. Why? Because the economy is perking up. But something is puzzling with that scenario. If the stock market always leads the economy, why should we pay any attention to what the economy is doing? Should we be looking in a rear view mirror to determine what’s going to happen in the future? The answer to that question should be self evident.

So, while the stock market has retraced just over 50% of the decline from the October 2007 high (1576.09--S&P 500) to the March 2009 low (666.79--S&P 500), that strength remains within the context of a classical retracement (40% to 60%) in what could still be a bear market rally.

But with new highs for the move having been created over the past few weeks, why would we continue to suggest such a possibility? First, one of our key indicators on the intermediate cycle, MAAD, has yet to make a new high for the move and remains below its Aug. 28, 2009 highs. Second, intermediate-term momentum has yet to confirm a new high. Third, Cumulative Volume eked out a new high for the move but with little enthusiasm. Fourth, major cycle momentum (monthly data) for the Dow Jones Industrial and Transportation Averages, the S&P 500 Index, and the Russell 2000 is now higher than at the peaks in 2000 and 2007. Monthly momentum for the Dow 30 is now higher than at the high in 1929, 1968, 1973, and 1987 (intermediate peak).

Nonetheless, since the “trend is your friend” we will continue to defer to market strength so long as market strength persists. But in the back of our mind we will continue to monitor those significant and negative divergences so that, ultimately, our portfolio will have the funds to purchase more than a Big Mac.

McCurtain Most Actives Advance/Decline Line (MAAD)

Yet again MAAD rallied to a new short-term high (daily data) and its best levels since the intermediate-term bottom was put in place just over a year ago. Significantly, however, MAAD has yet to confirm market strength on the larger and more important intermediate-term cycle (weekly data). While the difference between the Aug. 28, 2009 high and last weeks plot is only 7 units (advances minus declines) via that weekly data, the failure in the face of “overbought” short-term index statistics may still be enough to keep in place the negative divergence on the larger cycle.

Since MAAD Ratios on both the daily and weekly cycles were last just above neutral we cannot preclude the possibility more market strength could follow. But so long as the larger cycle continues to reflect skepticism by Smart Money to the extent large investors have been selling somewhat more shares than they have been buying, caution is warranted. In other words, if the underpinnings of the structure continue to erode as reflected by this indicator on that larger cycle, there is the longer-term possibility that all will not end well for those who believe that so long as the economy looks good they will make money in equities.

Click on charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)


New short- and intermediate-term highs were registered by CPFL last week to underscore the fact that options players remain optimistic about the stock market. If, however, the short-term cycle in the major indexes results in overall price weakness, we would look for the CPFL to move lower. Once a short-term low is put in place coincident with index pricing, the relationship of CPFL to the indexes would then become very important. If the indexes hit new highs with coincident strength from CPFL, the overall market trend could keep its longer-term positive tone. On the other hand, if the major indexes rallied to new highs and CPFL did not, such action would be similar to indicator negativity that developed into the 2000 and 2007 market highs.

In the meantime, until CPFL exhibits overt negativity by breaking support, or a defined uptrend line, or creates a divergence relative to index prices, we must remain somewhat optimistic about market prospects.

Click on charts to enlarge

Conclusion

Crosscurrents in the stock market persist. Despite the fact stock market prices have continued to rise on the short- to intermediate-term cycle with confirming action from our intermediate-term Timing Oscillator that flipped back to positive the week ending March 12, we remain concerned by the lack of upside volume, failed momentum, and the reluctance of weekly MAAD data to create a new high for the move.

While its possible those negative variations could be overcome via renewed market strength, the fact the short-term cycle has begun to look very tired could be evidence that we may have to experience a brief pullback before the status of the larger intermediate cycle can be thoroughly tested. If short-term cycle selling turns out to be something more serious and the intermediate-term uptrend (channel support last near 1070—S&P 500 Index) is threatened in earnest, the prescience of those negative indicators could be confirmed.

In sum, the short- (daily), intermediate- (weekly), and long-term (monthly) cycles currently remain positive, but with caveats. Ultimately it will be the relationship of index pricing and indicators that will dictate the outcome of a still tentative major cycle trend.

Click here for definitions of the indicators along with links to the original stories. Robert also describes these indicators in a recent I-Trade show presentation available online.

MAAD data for past 30 Weeks* CPFL data for past 30 Weeks

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

8-28-09

13

7

8-28-09

432501

191355

9-4-09

5

15

9-4-09

365834

179305

9-11-09

11

9

9-11-09

359980

126755

9-18-09

13

7

9-18-09

740103

210711

9-25-09

8

12

9-25-09

272801

300788

10-2-09

4

16

10-2-09

203911

461590

10-9-09

16

4

10-9-09

472452

118078

10-16-09

8

12

10-16-09

876199

125762

10-23-09

6

14

10-23-09

574031

238407

10-30-09

4

16

10-30-09

299062

898417

11-6-09

10

10

11-6-09

284004

210925

11-13-09

13

7

11-13-09

347029

147219

11-20-09

11

9

11-20-09

393221

229286

11-27-09

10

10

11-27-09

113184

195078

12-4-09

13

7

12-4-09

380418

272125

12-11-09

9

11

12-11-09

698727

204986

12-18-09

9

11

12-18-09

1879248

275057

12-25-09

14

6

12-25-09

81225

121215

1-1-10

4

16

1-1-10

58023

105653

1-8-10

17

3

1-8-10

196161

90275

1-15-10

5

15

1-15-10

171920

238731

1-22-10

3

17

1-22-10

166423

728001

1-29-10

8

12

1-29-10

230439

706372

2-5-10

7

13

2-5-10

393336

868741

2-12-10

10

10

2-12-10

252621

233578

2-19-10

15

5

2-19-10

308216

96223

2-26-10

7

13

2-26-10

259727

180469

3-5-10

16

4

3-5-10

447149

104117

3-12-10

17

3

3-12-10

1828237

111309

3-19-10

9

11

3-19-10

656439

147348

3-26-10

15

5

3-26-10

232614

113862


*Note: All data is for week ending on Friday even though ending date may be a holiday.
Unchanged issues in MAAD calculations are not counted.

MAAD data for past 30 days* CPFL data for past 30 Days

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

2-12-10

4

15

2-12-10

58269

61976

2-15-10

Holiday

2-15-10

Holiday

2-16-10

16

4

2-16-10

116077

60130

2-17-10

12

8

2-17-10

171751

50568

2-18-10

14

6

2-18-10

62422

42204

2-19-10

10

9

2-19-10

103190

51380

2-22-10

13

7

2-22-10

139899

35443

2-23-10

6

14

2-23-10

69573

74660

2-24-10

16

4

2-24-10

36350

29770

2-25-10

8

11

2-25-10

69545

64565

2-26-10

9

11

2-26-10

32711

30467

3-1-10

16

4

3-1-10

60014

38638

3-2-10

10

9

3-2-10

117313

51165

3-3-10

11

7

3-3-10

72093

33556

3-4-10

16

4

3-4-10

36815

42016

3-5-10

16

4

3-5-10

152611

37485

3-8-10

10

10

3-8-10

1507185

41172

3-9-10

15

5

3-9-10

89372

45511

3-10-10

15

5

3-10-10

93774

34334

3-11-10

11

7

3-11-10

47087

26732

3-12-10

5

15

3-12-10

72878

37903

3-15-10

9

10

3-15-10

172130

58620

3-16-10

16

3

3-16-10

80479

27525

3-17-10

13

6

3-17-10

276597

63778

3-18-10

6

14

3-17-10

118571

40039

3-19-10

7

13

3-19-10

189269

47595

3-22-10

14

5

3-22-10

32251

29750

3-23-10

17

3

3-23-10

128223

27766

3-24-10

12

7

3-24-10

55275

24882

3-25-10

6

13

3-25-10

61158

45267

3-26-10

13

6

3-26-10

19788

29395

*Note: Unchanged issues are not counted.

Robert McCurtain is a technical analyst, market timer and private investor based in New York City. He can be reached at traderbob@nyc.rr.com.

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