McCurtain's Equity Index Weekly Summary

With last Friday’s loss of 19.54 in the S&P 500 Index to 1192.13 and the drop in the Dow Jones Industrial Average to 11018.70, off 125.90, the odds are increasing that the short-term rally that began after the February 5 lows may be nearly over. Adding to the potential for more selling was Friday’s heavy downside volume with NYSE down volume exceeding up volume by nearly 12 to 1.

Many commentators on the business channels and in the mainstream media attributed Friday’s decline to the fraud charges leveled by the SEC against Goldman Sachs while wondering if the fallout from those charges will continue to negatively affect the market. While we wonder if Goldman has “sacked” the market once again, it remains to be seen if the accusations will hold up in court to carry that hugely profitable firm down the same road as other convicted Wall Street felons. The circus will nonetheless be a good sideshow even though we have never believed that such peripheral news is a serious determinant of stock prices.

Closer to home, it now seems likely that the market on the near-term could enter into a period of retrenchment to eliminate the excesses developed over the past two months. And while we suspect such a pullback should develop within the context of still positive intermediate and major cycle uptrends, the S&P 500 could nonetheless sink toward 1100 with the Dow toward 10250 without terminating those positive trends. Such selling would be toward about seven per cent if a worst case scenario developed and would certainly be good enough to seriously ruffle bullish feathers.

If short-term selling does develop to correct current “overbought” levels, and once a short-term low is put in place, the staying power of the larger trends would then be dependent on prices not only recovering all of the losses in the pullback, but also rallying to new highs and their best levels since the March 2009 lows. We would also need to see key indicators like MAAD and CPFL rally to new highs along with improvement in Momentum on both the short- and intermediate-term cycles. If such strength did not develop and if the indicators were progressively unable to reach new statistical highs, then we would begin to look for more significant topping action in the market.

This side of there, another theme to keep in mind is that “quality is always the last to go.” That old Wall Street adage means than in the endgame of a major bull move, it is the blue chip stocks that are sold last. Low priced stocks are the first to weaken. Preceding that selling, low caps usually stage a last ditch rally and spike higher before fading relative to the big caps. Using the Russell 2000 as compared to the S&P 500, we have yet to see smaller cap deterioration to suggest an impending top, let alone any extreme enthusiasm for the low caps. As a consequence, the current relationship between the low caps and the bluer issues suggests the bull trend is still relatively healthy. Back in 2007 the Russell peaked in the early summer and then failed to rally to new highs with the S&P in October. Such a divergence has yet to be repeated.

For the moment we suspect prices could hesitate, even enter into a near-term pullback, but it is not likely that the larger intermediate-term trend will be terminated on any price weakness. In other words, a final high in the bull trend is probably some weeks, if not months, ahead.

McCurtain Most Actives Advance/Decline Line (MAAD)
MAAD rallied to new short- and intermediate-term highs last week. But in so doing, both the Daily and the Weekly Ratios for the indicator moved into “overbought” territory. On the short-term cycle, MAAD is now as overheated as at any time over the past two years. On the Intermediate trend it as overdone as at any time since 2003.

While those “overbought” readings do not necessarily mean the market is destined for a pullback, they could mean that at least a period of hesitation is possible. We suspect that any pullback that develops could prove to be much like the month-long correction that lasted from the middle of last June to the middle of July or the small decline that occurred from the end of January this year to mid-February.

So long as MAAD corrects its recent excesses without serious price damage developing in the market, we suspect the indicator will remain positive, albeit without overt enthusiasm from the Smart Money players as has been the case for months. We are somewhat concerned about the levels of Intermediate-term statistics in MAAD, but a short-term pullback could simply bring that indicator back to neutral which would be a good “reset” point on the Intermediate cycle.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)
Like MAAD, CPFL rallied to new short- and intermediate-term highs last week and the best levels for the indicator since the March 2009 lows. And also like MAAD, CPFL is currently as “overbought” as at any time over the past 10 years on the Intermediate trend. Only the minor cycle has yet to rally into overheated territory.

Options players continue to remain enthusiastic about the stock market. There are currently no signs of any negative divergences developing. To do so, first CPFL would have to sink somewhat on the near term in conjunction with a minor cycle pullback, and then the indicator would have to rally and fail to make a new high in spite of price strength to new highs. Such action would mimic the upside failures in 2000 and again in 2007 and would then set the stage for a larger intermediate-term correction.

Click charts to enlarge

Conclusion
The short-term trend of the stock market could be on the verge of corrective action to eliminate statistical excesses developed over the past two months. Moreover, the two-month-old rally that began in early February is looking a bit frayed around the edges.

We suspect, however, that near-term selling will not develop into anything more than a pullback within the framework of the next larger intermediate trend that is still being favorably influenced by the dominant major cycle trend.

Over the next week the S&P 500 Index must hold above 1180 early in the week and above 1190 as the week progresses with the Dow 30 holding above 10900 to 10970. Those levels coincide with the lower edge of our moving average price channels that continue to mature on the smaller cycle. If prices sink below those points on a closing basis during the week and our proprietary short-term Timing Oscillator confirms negativity with a downward reversal, the minor cycle uptrend would be terminated and a correction would be in effect.

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

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

9-25-09

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

4-16-10

11

9

4-16-10

684317

282231

*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

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

4-12-10

19

1

4-12-10

167776

34077

4-13-10

7

12

4-13-10

96123

32036

4-14-10

15

3

4-14-10

177119

27271

4-15-10

9

10

4-15-10

142310

41992

4-16-10

2

18

4-16-10

295642

140482

*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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