Gold action may provide roadmap for stock indexes

Last week Gold rallied to a new all-time high and settled out the week toward $1280 an ounce. For the record, that’s an increase of nearly 475% since the metal reached a bear market low in London in July 1999 near $252 and $269.90 based on Comex Gold futures in April 2001.

But no matter how that massive bull market gain is sliced, and add in the fact that gold has been the best performer over the past decade, the detractors and the naysayers have continued to proliferate. “Gold is an anachronism,” they say. “You have to pay storage costs,” they add. “There’s no reason for gold to be rallying.” For the past 1000 points, and on schedule each time the precious metal has broken through another century level, the gold bears have come out of the woodwork claiming a gold apocalypse is just around the corner.

Nearly 80 years ago comic and political commentator Will Rogers was once asked what he thought about the stock market. Rogers thought a moment and then replied, “Buy the stocks that are going up and if they don’t go up, then don’t buy ‘em.” That advice was said in jest but, at bottom, Rogers’ advice was excellent. Simply put, what’s the point of buying an investment that does not appreciate in value? Or put another way, what’s the point of selling an investment, prematurely, that keeps on rising? The latter is a conundrum that gold bears have continued to stumble over for the better part of the past 10 years while failing to recognize the one giant plus that has continued to weigh in favor of gold – it keeps rallying to new highs.

Up until 2000 stock market prices performed much like the precious metals have been performing of late. The “new paradigm” was in full bloom. It was “different this time.” Unfortunately, the bloom came off the rose, Amazon did not rally to $440, and it was not a new equities era. While the market rallied smartly following the bear market into early 2003 and then again following the downside debacle in 2008, the enthusiasm for stocks that was evident from 1982 through 2000 has not reappeared. In other words, keeping in mind that quote from Will Rogers, there is now some reason to doubt whether stocks are as good an investment as at other periods in market history. Why? Because they have been locked in a major trading range since 2000 and on the smaller cycle for the better part of the last year. As opposed to gold, the stock market and the indicators by which we measure equities have been suggesting caution on several cycles.

In last week’s Market Summary we suggested three possible scenarios including a rally to new highs above the late April 2010 price peaks, a rally to levels somewhere this side of the April highs and then a decline, or weakness into the current environment with subsequent selling below the July/August price lows. Net, there still appears to be some opportunity in this market, but with caveats.

Whatever the outcome, we know for a fact that the broad market will not be “talked” up as our friends who hate precious metals have been attempting to do with gold. To believe that major markets can be prompted on “chat” is not only silly, but it is a foolish strategy to pursue. It won’t work because the “market” simply doesn’t care.

Given our three scenarios of “up”, “middle,” or “down,” we continue to note the status of our indicators. Cumulative Volume remains weak to underscore the fact that while the S&P rallied above its late June high in early August and then made another slightly higher high last week to better the August level, CV remains back at the late June levels. Clearly there has been a lack of upside enthusiasm. Countering CV caution, both CPFL and MAAD have participated on the upside and remain well above their February plot lows that on an equivalent basis were broken by the major market indexes during May. As a consequence, CPFL and MAAD are positioned to rally to new highs if the market can garner enough upside enthusiasm.

But more importantly, the longer this market takes to go up, the more we wonder at its ultimate ability to go up, given the fact that the 2008 bear market decline inflicted severe damage on not only market prices, but also on a wide array of market indicators. Some of that damage was repaired as prices rallied up from the March 2009 lows, but since the end of April the question marks have only gotten larger and larger.

In sum, unlike some of the folks who have been bearish on gold for the last 1000 points of a 1000 point rally, we choose not to try to “talk” the stock market one way or another. We prefer to be market followers while looking for anomalies that could translate into significant trend changes. At least the chances for denial can be substantially eliminated. In the current environment, the best “guess” we can offer is that the longer the major indexes take to seize upside opportunity, the greater the odds will be that the ultimate resolution of the stalemate could go in favor the bears.

McCurtain Most Actives Advance/Decline Line (MAAD)

Last week MAAD rallied to a new short-term high, or back above its July 27 plot highs. But with the Daily MAAD Ratio now declining from extremely “overbought” territory, there is some internal negative potential.

While last week’s new minor high in MAAD underscored the slightly higher high in the S&P 500 (Dow 30 not) and bettered the late July and early August indicator plot and market high, the lack of upside enthusiasm nonetheless remains.

Of note still is the fact that while MAAD has participated in the rally since the March 2009 price lows and has confirmed each new short-term high in the market, in fact leading each short-term high, the indicator has demonstrated nowhere near the upside vigor as was demonstrated in previous bull phases. In fact, MAAD has only recouped about one quarter of the loss since the October 2007 highs while the major indexes as measured by the S&P 500 and the Dow recovered more than 50% into the April 2010 highs.

Clearly, the performance of MAAD is yet another reason to remain wary of this market even in the face of modestly higher prices and EVEN THOUGH the indicator, like CPFL, is still relatively well positioned relative to the February 2010 lows and the April 2010 highs.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL tacked on upside inches last week, but whereas most of the major indexes either bettered their early August highs or are positioned to do so, the CPFL advance/decline line has begun to demonstrate a marginal negative divergence relative to prices. While this disparity could be erased if a dramatic wave of buying comes into the market and options players jump on board, the fact that CPFL remains somewhat indecisive as the Daily Ratio moves higher toward modestly “overbought” levels is reason for concern. Mitigating somewhat in favor of the bulls is that CPFL, like MAAD, remains well-positioned relative to its February 2010 low and April 2010 high.

As with MAAD, CPFL must confirm strength by the broad averages. An upside failure followed by weakness below plot supports would suggest possible and imminent and major market weakness.

Click charts to enlarge

Conclusion

Given historical evidence that it is unwise to fight a market trend, and we refer again to gold, the inability of the stock market to generate a sustainable longer term move over the past several months is no evidence that enough “talk” hasn’t come into the market to convince it to move higher. Fact is, the market will eventually move, and noticeably so, but it will do so in its own time.

While it may be true that the market is a reflection of human psychology and is the sum total of all known information at a given moment, it is also true that it usually gives off measurable clues before significant trend changes. Currently, while there are still small rays of hope for the bullish camp, we continue to wonder at the lack of upside sustainability. Unfortunately, lukewarm markets have a history of getting frigid, and very rapidly, when buyers either give up or evaporate.

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

*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

**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.