Stock market bulls need major indexes to flex muscle

Equity market prices have been moving net higher for the past several weeks but, to date, and despite strength to new highs by some of our key indicators, none of the major indexes has followed suit by also making new highs. Such strength in the majors is necessary to re-assert the long-term uptrend begun in March 2009. In a nutshell, an upside failure would not bode well for the bullish cause.

In simple terms, the market either makes new highs or it does not. The simplicity of that statement underscores a pet theme we have posited over the years that there are really only two things in the financial markets that ultimately count: where you BUY and where you SELL. Unfortunately, the maze of financial information we have to wade through on a regular basis sometimes does its best to obscure that truism. Not only is some of the information put forth vague, but some of it is simply wrong. Take the gold market to which we have alluded as an example of trying to “talk” a market down with bogus information. Some financial commentators would have us believe that there is no reason for gold to have rallied from under $300 to its recent price near $1400. Such advice is little consolation to those who chose not to enter the gold market because they believed such advice and is laughable to those who disregarded the rhetorical nonsense and bought.

So it is with the stock market.

Like all financial markets, equities offer investors three basic choices, no matter what the time frame they choose to participate in: Buy, Sell, or Hold. Given those choices they will ultimately win or lose. All the justifications and talking head blather will not change those immutable facts. Inevitably it all boils down to what does an investor do with a particular market “now”? In our stock market “now” we know that the three essential cyclical signals we follow on the Minor, Intermediate, and Major Cycles are all positive. The smallest minor trend turned positive the first week of September. The Intermediate flipped back to positive the week ending September 24 and the Major Cycle remains positive after turning higher over a year ago.

So the prognosis for the market looks good.

But here’s the problem. While equity market prices as reflected in the major indexes have been acting like a balloon that refuses to be pulled under water for the better part of the past several months, it’s also true that “overhead” at the April highs continues to act like a very heavy “manhole cover.” In other words, prices remain stuck between the early July lows and the late April highs, albeit with an upward bias of late.

On the positive side of the equation we noted last week that our Most Actives Advance/Decline Line (MAAD) rallied to a new high for the week ending October 8. Weekly data was last flat and the smaller Daily cycle in MAAD has yet to make a new high. Nonetheless both are positioned to move higher. Similarly, our Call/Put Dollar Value Advance/Decline Line (CPFL) is positioned to move upward on more market strength with the potential offered on both the daily and weekly cycles for new highs.

Nonetheless, we remain concerned by the lack of activity as reflected in our Cumulative Volume statistics even though there has been an increase in volume over the past several sessions now that prices are re-approaching those April highs. CV on the INX has only recovered about 1/3 of its loss from the April peaks while the Dow 30 has bounced back about one half its loss distance. CV in neither indicator is anywhere near the April highs. We are also concerned by the fact that short-term Momentum topped out back on September 17. That indicator has an historical tendency to fade before market prices and has a good record as a leading indicator.

So while the market has done relatively well over the past month and is positioned to make new highs above those April levels, we are still in much the same strategic position we have been in for months. In other words, “show me the money” is still the requirement no matter what the suggested potential.

McCurtain Most Actives Advance/Decline Line (MAAD)

After reaching a new high for the major cycle advance initiated in March 2009 for the period ending October 8, MAAD was flat last week with 10 Most Active issues on the NYSE up and 10 down. MAAD on the smaller and more sensitive Daily Cycle was net lower by 10 last week following a big loss in the data last Friday.

The sum of action in MAAD is that with the indicator at or near new highs on the two chief cycles there is upside potential since MAAD continues to “look” better than the broad market. That’s a positive sign since MAAD has historically tended to lead up and down. What is required to complete the puzzle, however, is for the major indexes to follow the lead of MAAD by rising above those late April price highs.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL was net higher again last week and has shown only positive readings since September 20. Unfortunately, and despite that bias, the indicator has yet to make a new high above its April peak on either the Daily or the Weekly Cycle. This is not to say that such action will not develop, but with the Daily CPFL Ratio now into “overbought” territory, there is a possibility for some developing short-term weakness to correct gains since the early September index price lows. If such action occurs before the indexes reach new highs, the outcome of the larger Intermediate-term rally would remain in doubt.

Bottom line is that CPFL must rally to new highs before, with, or after the major indexes to confirm the overall health of the broad market. An upside failure would be unacceptable from a bullish point-of-view.

Click charts to enlarge

Conclusion

The S&P 500 Index rallied 11.04 points last week with the Dow Jones Industrial Average ahead 56.30 points. The S&P and the Dow 30 along with all of the other major indexes have failed to make new highs after the late April levels. At the same time, while MAAD continues to look good on both the Minor and Intermediate Cycles, strength just above and just below the April resistance points along with as yet undecided action by CPFL continues to reflect a lack of concerted upside buying. In other words, nothing but new highs, despite indicator strength that reflects “internal” market action will be sufficient to re-assert the major advance since it is Indexes, funds, and individual issues which are purchased, not indicators.

In sum, while we now suspect that the odds may favor an upside resolution of the stalemate that has gripped the market since last April, we continue to need solid proof in the form of higher prices that this market has re-asserted the major cycle advance.

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.