Stock market near-term battle counters long-term conflict

Some years ago when we were learning the niceties of the Art of War during Basic Training, Sgt. Wilson, the Senior DI (Drill Instructor), was instructing his platoon one morning in the use of the M14 Assault Rifle. "Nuggets," he said, "When you are using this weapon it is imperative that you fire a round into the ‘kill zone’ of the target, otherwise you will not succeed in your fire mission. Put another way, troops, ‘a miss is as good as a mile.’"

That is a statement we have never forgotten. Whether it’s on a military firing range, the basketball court, the golf course, or the stock market, a miss is a miss.

Since we’re not paid to discuss hoop expertise in this space, Sgt. Wilson’s "advice" is clearly apropos of our stock market discussion.

Following the April highs the S&P 500 Index lost 17.1% to its early July low at 1010.91. Since then the bellwether has rallied back 17.6% and was last just under 2.5% from rallying back above the April high. In the same time period the Dow Jones Industrial Average lost 14.6%, rallied back 16.6%, and was last just under .04% from making a new high to re-assert its Major Cycle advance.

More importantly, our Weekly Most Actives Advance/Decline Line (MAAD) rallied to a new high the week ending October 15 with our Call/Put Dollar Value Flow Line (CPFL) confirming that action with strength last week to a new high for the move since March 2009. While Daily MAAD statistics have yet to confirm the weekly data, the Daily MAAD Ratio has moved steadily back into short-term "oversold" territory since reaching a peak back on September 15 at 2.44 with a reading as of Friday’s close at .79. Daily CPFL stats moved to new highs last Tuesday. And adding to the positive mix, all cycles, Daily, Weekly, Monthly (Short-, Intermediate-, and Major) are positive.

Clearly there is a favorable tone to the stock market at this juncture. And while it could be a bad bet to suggest short selling into this market, we continue to remember the sage advice of Sgt. Wilson: "A miss is as good as a mile." What we’re driving at is that while we could see the Dow 30 pop that extra inch to make a new high, the S&P 500 must rally another 30.38 points and just under 2.5% to reassert the major uptrend begun in March 2009. Will such action happen? Probably. But there is Cumulative Volume which remains weak. In fact, CV was last nearly 43% below its April peak and nowhere near making a new high above its best levels back on April 15 and two weeks before the broad market topped out and headed lower on April 26. And that is after CV confirmed each new high in the rally that began after the March 6, 2009 index lows.

So we are left with a conundrum. The market looks as if it wants to go higher. The S&P 500 Index and the Dow Industrials could eclipse their late April resistance highs relatively soon. At the same time, with all cycles positive and with CPFL and MAAD underscoring upside potential with new highs having been reached on the larger Intermediate Cycle, only wishful thinkers would continue to bet on a significant reversal at this time.

Unfortunately, the poor quality of Cumulative Volume and deteriorating Momentum (Short-term Momentum peaked back on September 17) make us wonder at the "quality" of this rally. The fact is that both the 2000 and 2007 market highs were preceded by negative divergences that ultimately weighed heavily on the market. For the moment, however, the weight of evidence seems to be tipped in favor of the bulls.

McCurtain Most Actives Advance/Decline Line (MAAD)

After rallying to a new Intermediate Cycle high the week ending October 8, the Weekly Most Actives Advance/Decline Line hit another new high last week, albeit only marginally. Daily MAAD challenged its April highs on October 12 and was just 11 units from making a new peak, but daily data has worked lower over the past several sessions. Nonetheless, the "internal" MAAD correction in the face of net higher prices in the major indexes has moved the smaller cycle back into "oversold" territory. Whereas the Daily MAAD Ratio reached a statistical peak on September 15 at 2.44 the indicator was last at .79 in bullish territory. In other words, MAAD may be repositioning itself for another upside move.

Aside from currently bullish considerations, we must continue to point out that MAAD’s overall performance since the March 2009 lows has remained lackluster relative to the major indexes even though the indicator has confirmed all of the new highs in the rally including the current upside market attempt. In other words, while Smart Money appears to have remained skeptical about the longer-term staying power of the bull move over the past 19-plus months, they have nevertheless been on the buy side when the market has advanced.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL on both the Daily and Weekly Cycles rallied to a new Intermediate Term high last week. Large blocks of calls last Tuesday (10/19) pushed the indicator upward and above its late April/early May highs. And while the CPFL Ratio has moved back into "overbought" territory for the first time since the early July plot lows, such readings are not necessarily a sign the market is on the verge of a reversal. There have been points of coincidence, but as a general rule, the CPFL Ratios tend to lead the market. This could be one of those periods.

On the flip side of the positive coin, while CPFL was last plotted at its best levels since the March 2009 prices lows, such strength is merely an indication of implied potential. In other words, the market must follow suit. CPFL cannot "drag" market prices higher although we have never seen an instance where CPFL rallied higher before the market and the market did not follow suit.

Conclusion

The stock market continues to exhibit upside potential. Our two key indicators, CPFL and MAAD, have confirmed that bias. All cycles are positive and there is no denying the upward bias of prices over the past several weeks.

We nonetheless remain concerned over the "quality" of the rally since Cumulative Volume (CV) remains remarkably weak and Momentum on both the Short- and Intermediate-term cycles is not confirming strength.

So, in a nutshell, we cannot deny the upward trajectory of the market, but like a reluctant debutante, we are not overly impressed by the longer-term prospects for this rally even though we could see new highs above the late April resistance highs and even some strength beyond those levels. Put another way, the market could win this battle, but will it win the longer-term conflict or register a big miss?

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 weeks** CPFL data for past 30 weeks**

**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.