For stock market, fall can bring bear trends

Autumn history: fireplace fires and crashing markets

Our favorite time of the year is rapidly approaching – fall. In short order we’ll be able to take those long strolls with crunching leaves under foot as the steam from our breath tells us summer is finally over. Fireplace fires will be lit and get-togethers with friends will be planned. Those hazy, humid days of August with shorts and t-shirts morph into a chill with sweaters and mittens. Ah, fall….

But the Autumnal Equinox can also be accompanied by less auspicious events. In fact, some of the worst bear trends in stock market history have developed toward the end of the third quarter of the year. The granddaddy of them all occurred in 1929 when the Dow Jones Industrial Average peaked on September 23 and then proceeded to lose nearly 50% of its value over the next few months as the Great Depression began. Ultimately the Dow gave up nearly 90% of its value in that major cycle decline that lasted until July 1932. In 1987 the market peaked on August 26. During the crash that lasted until late October, the Dow 30 lost nearly 41% of its value even though bulls were ultimately given a reprieve since the decline proved to be nothing but an intermediate-term blip in a major advance. The Dow rose more than 700% over the next 13 years into the 2000 highs. Most recently, the market peak in October 2007 was followed by a 54% loss in the Dow which hit a significant low in March 2009.

So are we offering some not so subtle bearish hints heading into the fall of 2010? Perhaps a few, but with caveats.

Aside from the fact that the September 22 will mark high bloom for the Autumnal Equinox, that period of the year when nine of the most violent storms in U.S. history occurred, “storms” which have occasionally proven to be a metaphor for equity prices, it is nonetheless true that the stock market has demonstrated little conviction for the better part of the past year. In fact, a buy and hold investor is really no better off now than back in early November 2009. Even nimble short-term traders have been challenged to take profits out of the market. Except for the nicely trending rally from early February through late April, moving in and out of the market has been treacherous. So, is the market encountering a lull before the, well…, storm?

And on the internal front, for months we have been noting that our Most Actives Advance/Decline Line (MAAD) has been in synch with the market on the upside, but that the recovery of the indicator relative to the March 2009 price lows has been anemic. MAAD has only retraced about 20% of is decline while the market is recovered more than 60%. While the upward bias of the indicator is positive, it is the lack of overall Smart Money participation that has acted as a damper on the performance of MAAD. That added to the fact that it wouldn’t take much selling to push the indicator downward and below those March 2009 lows. Put another way, if MAAD makes new lows, such action would not bode well for the broad market.

There is another problem hampering our market optimism – Cumulative Volume. CV, which is a measurement of net upside and downside activity relative to price, has been weak for nearly a year and has been deteriorating, net, since the beginning of the formation back in January of what could prove to be a Head and Shoulders distribution top. CV also took a big hit after the April 2010 price highs in that it moved dramatically below the February lows as the May mini-crash developed. CV has also shown little enthusiasm since the July lows and was last plotted at levels in the S&P 500 and Dow 30 at points not seen since May 2009. Clearly CV and MAAD, which are created from two entirely different streams of data, remain unenthusiastic about market prospects.

Last week the market sold sharply lower on Wednesday (nearly 265 points). That selling and deteriorating momentum probably terminated the short-term uptrend initiated in early July. At the same time, the potential Right Shoulder of a possible Head and Shoulders top may be nearing completion. If this market is going to resolve itself on the downside within the context of an Intermediate Cycle which remains negative, we would need to see concerted selling below those early July lows at 1010.91—S&P 500 and 9614.32—Dow 30. On the flip side, nothing but buying above the late April price highs at 1219.80—S&P 500 Index and 11258.01—Dow 30 would reassert the uptrend begun in March 2009.

McCurtain Most Actives Advance/Decline Line (MAAD)

Our Most Actives Advance/Decline line peaked on July 27 and nearly two weeks before index pricing. Currently the indicator remains in a short-term downtrend with the Daily MAAD Ratio slipping back into short-term “oversold” territory. As we’ve mentioned before, however, “oversold” is not always what it seems to be.

Simply put, what the indicator is telling us at this juncture is that Smart Money preceded the market on the sell side and remains negative on the minor cycle with little demonstrable cheer leading on the longer term. Given our preliminary comments in this week’s Market Summary about the anemic performance of MAAD since the March 2009 lows, we continue to suspect that it would behoove investors with a net long bias to take a very hard look at downside stop points since the underpinnings of this market continue to look iffy.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL was net negative last week, but not by much. The indicator continues to remain locked between its February lows and April highs. A dramatic market move in one direction or another would probably cause CPFL to either make a new high above that April peak, or to break below support at that February low. A failure to confirm market action would leave index prices in a quandary.

What the indicator is currently suggesting from the cumulative action of options buyers is that call/put buyers are in a wait and see mode. It is a sure thing, however, that whatever market movement develops in the weeks just ahead, sustenance of that move will require CPFL confirmation. As we’ve noted before, we have never seen an instance where market movement was not confirmed by CPFL.

Click charts to enlarge

Conclusion

The short-term uptrend that began back at the early July lows was probably ended last week. Sharp downward movement in prices last Wednesday with virtually no upside follow through Thursday or Friday suggests more selling could follow. When coupled with the weak internal dynamics of this market, we continue to wonder as we move into a historically volatile time of the year if the market could be setting itself up for a decline of some importance. If our suggestion that a Head and Shoulders distribution top that has been developing since last January unfolds, resolution of the pattern would come in only one way -- a significant decline with movement below the July lows.

If our prognosis is overly pessimistic, we can only continue to suggest that nothing but new highs and movement above the April 2010 intermediate-term highs will resolve the longer-term issue in favor of the bulls. Considering current market internals, the bullish camp has a very large point to prove. In other words, if the bulls do not prove their case and relatively soon, it could be about time to pull those long chestnuts out of the fall fires.

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

Date NYSE Adv NYSE Dec Date OEX Call $Volume OEX Put $Volume
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
6-18-10 11 9 6-18-10 357965 119532
6-25-10 5 15 6-25-10 91068 599114
7-2-10 4 16 7-2-10 1034509 771231
7-9-10 18 2 7-9-10 635690 110808
7-16-10 9 11 7-16-10 171633 445073
7-23-10 16 4 7-23-10 322870 174663
7-30-10 15 5 7-30-10 199970 217368
8-6-10 15 5 8-6-10 271701 115037
8-13-10 3 16 8-13-10 132060 409972

*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
7-2-10 6 13 7-2-10 210967 130326
7-5-10 Holiday 7-5-10 Holiday
7-6-10 12 6 7-6-10 47780 102195
7-7-10 17 3 7-7-10 156524 74778
7-8-10 14 6 7-8-10 113395 43732
7-9-10 12 8 7-9-10 106386 32027
7-12-10 12 8 7-12-10 70843 33999
7-13-10 16 4 7-13-10 153048 59755
7-14-10 8 11 7-14-10 74345 55723
7-15-10 14 6 7-15-10 123102 53228
7-16-10 3 17 7-16-10 34284 99379
7-19-10 14 6 7-19-10 198424 67821
7-20-10 13 7 7-20-10 30569 72125
7-21-10 6 14 7-21-10 30453 61597
7-22-10 17 3 7-22-10 121027 58361
7-23-10 14 6 7-23-10 38486 39440
7-26-10 18 2 7-26-10 51374 63509
7-27-10 14 6 7-27-10 70850 59758
7-28-10 7 13 7-28-10 17125 48089
7-29-10 8 12 7-29-10 74444 40451
7-30-10 7 12 7-30-10 41025 42071
8-2-10 15 4 8-2-10 141725 31355
8-3-10 5 14 8-3-10 47386 35459
8-4-10 10 10 8-4-10 52252 20624
8-5-10 6 14 8-5-10 31608 23941
8-6-10 8 12 8-6-10 76376 35429
8-9-10 11 9 8-9-10 45247 19760
8-10-10 5 15 8-10-10 54235 52153
8-11-10 3 17 8-11-10 69487. 107497
8-12-10 11 9 8-12-10 52311 72308
8-13-10 10 9 8-13-10 31747 51598

**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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