McCurtain's Equity Index Weekly Summary

“Uncertainty” -- that old fall back word for the financial press

One of our favorite quotes often gleaned from the financial press goes something like this: “Investors sold today because of stock market uncertainty.” Or “Investors are protecting themselves in an uncertain market.” Naturally financial markets writers have to put something in the allowed space, but whenever we see that old “uncertainty” word we always groan: “Has there ever been a time in the history of stockdom when the markets haven’t been uncertain?” Just exactly when was that precise time when “certainty” reigned.

Now while it’s possible that the levels of risk and uncertainty have varied over the years, you will never find a major “Buy” signal on the cover of Time Magazine. The same for a major “Sell.” To the contrary. It is far more likely that crowd psychology will be reflected with such headlines as: “Money managers say stocks are a still a “Buy” within range of a major top. Same goes for a major bottom: “Will stocks every come back?” Good grief, let’s hope not if we have to read any more dumb stories.

We especially remember a conversation we had with a CNN “analyst” about five years ago when the analyst declared that the housing market was “bullish because Housing Starts are over two million and rising!” We hastened to point out that each time over the past 70 years the starts have exceeded two million, the housing market has turned lower. In fact, starts reached 2273 in January 2006. You know the rest of the story since then.

But back to the market….

Last week the S&P 500 Index rallied 2.5% with the Dow Jones Industrial Average higher by 2.8%. Last Thursday’s action was noteworthy to many analysts because the 30.95 point gain in the S&P and the 273.78 point rally in the Dow 30 were accompanied by historically high NYSE Up Volume as compared to Down Volume. The ratio was at 41 to 1. One source suggested that was the highest Up Volume day since 1957. As a point of reference the first big up day following the March 6, 2009 lows occurred on March 10, 2009 when the ratio hit 26 to 1 on strength in the major indexes.

So is it possible the market has put in place a significant low following nearly six weeks of concerted selling, fracturing of 200-day moving averages, and price weakness in the major indexes back below the February 2010 price lows? Sure it’s possible. Just about anything is possible in the market including a “big finger” seller who may have caused equity prices to sink nearly 1000 Dow points back on May 6.

While Up Volume on the NYSE spiked sharply last Thursday, one of our bellwether indicators, the Call/Put $Value Flow Line (CPFL) did not. It had net sellers exceeding buyers by 82263 to 47815. In fact the indicator didn’t have a single up day last week (see accompanying daily table) and was, as a consequence, net negative on the week. Our Most Actives Advance/Decline Line fared somewhat better late in the week, but only after sinking to a new short-term low on Monday and re-testing that level on Wednesday. The indicator remains in a downtrend initiated after the April 14 plot highs. Both CPFL and MAAD remain “oversold” on the minor cycle.

So what are our upside probabilities? First, we need to see price and indicator confirmation. CPFL and MAAD must exhibit some positive signs by breaking defined downtrend lines on the minor cycle and the respective Daily Ratios in those indicators must turn up with some force. We must see Stochastics and our proprietary Timing Oscillator move above neutral at .50 and we must see price action in the S&P above its 10-day price channel at 1094-1086 for the upcoming week with the Dow continuing to hold above its channel (10200-10144), given the fact the major average is now, by default, just a notch above Monday’s 10200 level.

If we get minor cycle confirmations on the buy side, the extent of the upside move then becomes the issue. It is a certainty that nothing but new highs above the April 26 index highs (1219.80—S&P and 11258.01—Dow 30) will reassert the major trend. But there is one distinct possibility between here and there. Prices could rally back toward resistance at 1160—S&P and 10780—Dow 30. Failing to make new highs prices could then sell lower, break supports at the recent lows (1040.78—S&P and 9757.55—Dow 30) and then move down to complete a possible a-b-c correction of the move since March 2009.

In sum, if our upside criteria for the reversal of the short-term negative are met, we could see a decent rally that could carry the S&P back to at least 1160 and the Dow 30 to 10780. Strength much beyond those levels would negate downside potential and would begin to weigh heavily in favor of the bullish camp. On the other hand, a rally, a failure to make new highs in the vicinity of our upside targets, and then a decline back to and below recent lows would suggest at least a “C” leg decline and possibly a full 40% to 60% correction of the rally since March 2009. Such weakness would carry the S&P toward a range of 1000 to 880 with the Dow back to 9340 to 8385. Stay tuned because the market will probably, no doubt, remain…uncertain.

McCurtain Most Actives Advance/Decline Line (MAAD)
While index prices posted modest gains last week, MAAD perked a bit higher late in the week, but remained below a defined short-term downtrend line stretching back to the April 14 indicator highs. On the bullish side of the equation, however, MAAD remains deeply “oversold” on the minor cycle and modestly so on the Intermediate Cycle. Also, we continue to note that the indicator did not make new lows below the February support levels along with index prices. That could be a near-term bullish sign.

In short, MAAD is in much the same position as the major market indexes: it must rally to new highs to confirm the major uptrend, or index strength will remain suspect. If the indexes make new highs and MAAD does not, that would be a bearish development. If neither MAAD nor the indexes make new highs, the implications would be obviously bearish.

We should also continue to note that while the broad market has staged a powerful rally over the past year, MAAD has not. It has only retraced about one fifth of its decline from the October 2007 highs. As a consequence, it would not require much concerted selling to force MAAD to new all-time lows. That development would definitely put a knot in the bullish rope.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)
While the major market indexes rallied modestly last week, CPFL did not demonstrate a single up day as reflected in Call/Put Dollar Value statistics. In fact, on the week Put Dollar Volume exceeded the call side by just over 2 to 1. That disparity reflects a lingering skepticism on the part of options buyers that the underpinnings of the market are stronger than they look. While it’s possible options participants could prove to be behind the curve, it’s also true that their confirmatory participation is required if the market rallies. It’s also true that CPFL must rally to a new high with prices if the bull trend is to remain viable. We should note that we have never seen an instance where CPFL failed on the upside and the market continued substantially higher.

On the bullish side of the equation, however, it’s also true, like MAAD, that CPFL has not been as weak as have index prices. In fact, it has only retraced about 50% of the distance from its February lows whereas index prices have broken supports at the February lows. So, over the next few weeks as the short-term cycle will probably turn higher, a positive orchestration of CPFL will be required to unpin index pricing.

Click charts to enlarge

Conclusion
Market prices rebounded modestly last week. And last Friday an historically high Up Volume to Down Volume ratio day was recorded. One report had it was the highest U/D day since 1957. But, as “they” say, the proof is in the pudding. There must be upside follow through. And while we suspect a short-term bottom is probably in the making, or may have already been seen, confirmed short-term strength must result in new highs by the major indexes within a reasonable time frame AND key indicators such as MAAD, CPFL, momentum, Stochastics, and our proprietary Timing Oscillator must verify that positive action.

In other words, an upside failure in this environment would simply play into the hands of the bears and could very well be followed by selling to new Intermediate-term lows that could result in a 40% to 60% retracement of the advance since March 2009. Ultimately, the extent of an Intermediate-term decline would determine the staying power of the Major Cycle trend.

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

Date NYSE Adv NYSE Dec Date OEX Call $Volume OEX Put $Volume
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
4-23-10 15 5 4-23-10 1049228 141637
4-30-10 2 18 4-30-10 139488 363448
5-7-10 3 17 5-7-10 929902 2329559
5-14-10 14 6 5-14-10 263151 730414
5-21-10 5 15 5-21-10 1172844 1654053
5-28-10 10 10 5-28-10 477797 584893
6-4-10 5 15 6-4-10 265339 515370
6-11-10 12 8 6-11-10 263791 544655

*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
4-30-10 2 18 4-30-10 32835 174894
5-3-10 15 5 5-3-10 43077 47782
5-4-10 5 15 5-4-10 102186 192407
5-5-10 9 11 5-5-10 663717 159880
5-6-10 4 16 5-6-10 277786 908812
5-7-10 7 13 5-7-10 203860 595031
5-10-10 15 5 5-10-10 108827 106763
5-11-10 9 10 5-11-10 54680 96146
5-12-10 13 7 5-12-10 121805 48185
5-13-10 9 11 5-13-10 23267 65275
5-14-10 4 16 5-14-10 88891 217422
5-17-10 5 14 5-17-10 132528 141467
5-18-10 5 15 5-18-10 154363 204810
5-19-10 10 10 5-19-10 69021 158617
5-20-10 4 16 5-20-10 134710 485429
5-21-10 15 5 5-21-10 588040 238043
5-24-10 5 15 5-24-10 78521 116561
5-25-10 11 8 5-25-10 140868 317225
5-26-10 11 9 5-26-10 133348 196040
5-27-10 16 4 5-27-10 112601 59778
5-28-10 5 15 5-28-10 48142 61489
5-31-10 Holiday 5-31-10 Holiday
6-1-10 3 17 6-1-10 70492 99096
6-2-10 16 4 6-2-10 59135 60801
6-3-10 10 10 6-3-10 74934 57933
6-4-10 4 16 6-4-10 131598 195508
6-7-10 6 14 6-7-10 27214 126032
6-8-10 15 5 6-8-10 71740 101066
6-9-10 5 15 6-9-10 38268 132742
6-10-10 17 3 6-10-10 47815 82263
6-11-10 12 8 6-11-10 78754 102552

*Note: Unchanged issues are not counted.

Robert McCurtain is a technical analyst, market timer and private investor based in New York City. If you would like to read more about how the CPFL is constructed, read a Futures article on the concept. This will take you to the MAAD article. Robert can be reached at traderbob@nyc.rr.com.

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