Equity Index Indicator Summary

Some years ago a famous comedy team did standup gags and corny jokes that were delivered in a laconic style and allowed the pair, Moran and Mack, to become one of the most successful comedy acts of their era.

One standup skit went….

First Comedian: When I was a boy we had a farm.
Second Comedian: And just what did you raise on the farm?
First: We raised cows.
Second: And was the farm successful?
First: No, we had to shut it down.
Second: And why was that?
First: Well, we discovered that the white cows ate more than the brown cows.
Second: And how many white cows did you have?
First: We had 250.
Second: And how many brown cows did you have?
First: We had 10.
Second: Well, of course, the white cows would eat more than the brown cows.
First: We found that out.

Amazing, isn’t it, how something so obvious is figured out with so much effort? How a faulty premise can be destroyed so easily? So it is in the financial markets where there is no lack of faulty assumptions. One of our favorites is the traditional “buy and hold” strategy. Buy and hold proponents believe that all you have to do to make money in the stock market is to acquire a position, hang onto it, and then reap the rewards. We’ve touched on this flawed strategy before, but suffice to say that it continues not to work. The catastrophic decline in 2008 was an example of just how badly buy and hold failed. And since it only takes one exception to destroy a rule, 2008 was probably that one exception.

So where does the buy and hold strategy fit into the current market environment? Increasingly we have been hearing that the “worst has been seen,” that “earnings are rebounding,” and that “timing the markets is an exercise in futility.” If the latter “truth” were true, we would not have been able to call the top in the housing market in 2006, the tops in the stock market in 2000 and 2007, or the lows and subsequent run-up in gold in late 2008.

So we come back to our faulty premise argument: if the agenda is based on a false premise, then the conclusions will ultimately be wrong. Just because a syllogism allows for variable inputs does not mean that the conclusion will be correct. For example: “Stocks tend to appreciate on the long-term and stocks are rising now, therefore if I buy now I will make money on the long term.” No. The critical flaw in the argument is that the buyer has not considered that even though the underlying purchase may eventually make money, the purchaser may be dead. Therefore “timing” is critical. In other words, just because the stock market had a net upward bias from late 1974 through early 2000 does not mean that the stock market will continue to be a profit maker in the future. That point was proven in early 2000 and again in late 2007.

And yet we continue to hear that the only way to make money in the stock market is to buy good securities and hold them for the long-term. Tell that to someone who purchased Citicorp in late 2006 (57 and last to 4.57) or Ford Motor (38.63 to 12.99). How about MGM (100.17 to 14.76) or Pfizer (50.04 to 17.25)? Even most mutual funds have yet to recover to the bull market highs of 2007, let alone 2000.

Will those issues ever recover? Maybe. Maybe not. The point is, simply hanging on and hoping for the best is not a strategy. And while stocks have staged a powerful rally over the past 13 months, it still remains to be seen if this market has the legs to seriously challenge the October 2007 highs or if strength will fail in the not too distant future. In any case savvy investors must have a strategy.

We use three timing cycles (minor, intermediate, and major) to establish “context.” If we know that the major cycle is positive as is currently the case, then we presume that any pullbacks within that framework could be buying opportunities just as, on the reverse side of the coin, when the major cycle was negative in 2008, countertrend strength was used as selling opportunities.

Nonetheless, moving into the second week of April 2010, we know that there are a number of negative divergences between prices and “internal” statistics. Until we see definitive price deterioration to the extent the intermediate uptrend is threatened at key supports (1075—S&P 500 Index and 10143—Dow 30) and our proprietary intermediate-term Timing Oscillator turns negative, we must continue to remain cautiously bullish. We also know that the extant trend will not last indefinitely.

We believe that’s an unflawed premise and a solid assumption because we have carefully counted our cows.

McCurtain Most Actives Advance/Decline Line (MAAD)
Last week MAAD, using weekly data, rallied to a new intermediate-term high and its best levels since the March 2009 lows. That strength gives tentative approval to recent market strength by the so-called “Smart Money” crowd to the extent they have been apparently buying a bit more than they have selling. On the negative side of the equation, while the new high is a fact, it comes after several months of equivocating to the extent MAAD peaked the week of August 28, 2009 and had not revisited its highs until last week.

Nonetheless, now that a new high has been made by MAAD, we must assume that the underlying market tone is still bullish, the potential for shorter-term pullbacks notwithstanding.

Ultimately, when the stock market puts in place its final highs for the uptrend that is now 13 months old, we would expect to see MAAD create a series of negative and prescient divergences into those final price peaks. Such was the case in 2000 and again in 2007.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)
Call/Put Dollar Value statistics reached new cumulative highs for the move on both the minor (daily) and intermediate (weekly) cycles last week. Both cycles remain in synch with the market and neither has begun to trace out what could prove to be, ultimately, negative divergent action into a longer-term high. In fact, the Daily CPFL Ratio remains “oversold” with the weekly Ratio last about midway into its overbought to oversold range (1.51).

As a consequence, and lacking other evidence, we will continue to assume higher prices could evolve, net, on the larger intermediate-term cycle that continues to function within the context of a positive major cycle trend.

Click charts to enlarge

Conclusion
With the short-term cycle the only trend that currently looks vulnerable to the extant a near-term decline could develop, we will continue to presume that any weakness that develops will occur within the framework of larger intermediate and major cycle positivity.

Currently, we could see three possible scenarios developing:

  1. Prices simply continue higher with the S&P 500 Cash Index ultimately working toward 1350 (last at 1194.37) and upside price channel resistance before longer-term selling develops.
  2. A short-term decline commences soon, but despite weakness the S&P 500 Index remains intact on the next larger cycle. Once a correction is completed, prices resume their upward march and new highs are made.
  3. Equity market prices remain in the vicinity of short-, intermediate-, and major cycle highs (for the move since March 2009). New highs might develop, or not. In any case, negative momentum and short-term “overbought” conditions could kick in to force prices lower. A challenge to the recent highs might then be staged, but fail. A negative reversal on the intermediate-term trend could then follow and the viability of the major cycle trend could then come into play.

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

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

4-2-10

13

7

4-2-10

153692

138948

4-9-10

17

3

4-9-10

310430

99415

*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

2-26-10

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

3-29-10

11

9

3-29-10

137740

105076

3-30-10

6

14

3-30-10

15633

31967

3-31-10

7

13

3-31-10

61075

42805

4-1-10

17

3

4-1-10

36215

26434

4-2-10

Holiday

4-2-10

Holiday

4-5-10

17

3

4-5-10

66102

42763

4-6-10

14

6

4-6-10

71074

26189

4-7-10

8

11

4-7-10

63920

36679

4-8-10

15

5

4-8-10

74032

22170

4-9-10

13

7

4-9-10

51056

38095

*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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