Stock market's April highs remain elusive

So where’s the bride? All the guests are in place. The flowers have been put out and the beautiful tiered cake awaits the post nuptials. The anxious groom with his best man and the bridesmaids are ready. The organist has played Pachelbel's "Canon in D" at least a dozen times along with other traditional wedding favorites in preparation for “Here Comes the Bride.” But it’s still a toss up as to whether or not the bride is going to show. Will she or won’t she?

Thrown rice aside, you no doubt get our metaphor here. After threatening on the upside for weeks the major market indexes including the S&P 500, the Dow Industrials, OEX 100, Value Line Index, Russell 2000, and the NASDAQ Composite have yet to make an appearance by moving to new highs above their late April price peaks. And while the NYSE Daily Advance/Decline Line made a new high on September 9, that positive bias was negated by a lackluster NYSE Up/Down Volume that has only recovered about 50% of its losses since the April high.

The Dow Jones Transportation and Utility Averages have bettered their April highs, but Cumulative Volume in both remains decidedly weak and is nowhere near making new highs. And while our Call/Put Dollar Value Flow Line (CPFL) on both the Daily and Weekly Cycles has made new highs along with our Weekly Most Active Advance/Decline Line (MAAD) data on the Daily Cycle remains below the April levels.

While we certainly cannot deny the reality of the current rally that began after the July lows and which has carried the S&P nearly 15% higher and the Dow by nearly 14%, there is also no denying the fact that the underpinnings of this up move do not look good. Whereas strength in the broad market following the March 2009 price lows was accompanied by increasing upside volume as each new short-term high was reached, that tendency began to fail after the January 2010 short-term highs. Thereafter from the February lows to the April highs, volume noticeably deteriorated. Then, once the July lows were created following the mini-crash in May, volume as reflected in our Cumulative Volume statistics continued to diminish. Put another way, over the past several months rallies have been marked by decreasing activity while declines have been accompanied by increasing selling. Such action in our experience is usually a sign, not of accumulation, but of distribution. Similar diminishing upside volume numbers were evident into the 2000 and 2007 major market highs.

Since it’s obvious that lower prices a rally does not make, we are nonetheless left with a conundrum: market internals could continue to allow for higher prices, even strength above those late April levels. But the problem is the quality of that strength leaves so much to be desired in terms of Cumulative Volume and Momentum, which peaked over a month ago on the Minor Cycle, we continue to wonder if this rally could prove to be a massive draw play. Make new highs to reassert the uptrend begun over a year and a half ago by attracting weak players and then set the stage for a big down. Why a big down? Because this market, despite the gains since March 2009 is still nowhere near bettering those October 2007 index highs and could ultimately be viewed in retrospect as merely a countertrend up in a longer-term down, gains to date notwithstanding.

Could the poor volume scenario change? Yes, it could. But will it? That of course, is the question: will it? Given the pattern of deteriorating volume characteristics into the 2000 and 2007 market highs, we suspect the bullish crowd will not win this longer-term round either, even though index prices could better those April highs in the not too distant and could even add to the gains a bit. But to think that the late 2007 highs will be bettered before the uptrend begin in March 2009 is over is, in our opinion, a pipe dream.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD remained lackluster last week. Daily data lost a few notches relative to plot levels a week earlier while Weekly data was dead even. What has occurred, however, over the past few weeks is that the Daily Ratio in MAAD has corrected back into “oversold” territory. And to the extent “oversold” is, indeed, “oversold,” the stage could be set for a resumption of buying.

With Weekly MAAD statistics holding in new high territory, there is a relatively positive bias to the indicator. And with Daily data poised to make new highs above those late April levels, it wouldn’t take much to push MAAD upward on the smaller cycle. Naturally such action would be spurred by higher market prices which would probably create new index highs, given the proximity of prices to those April peaks.

But as we’ve noted previously, the failure of MAAD to fully participate on the upside since the March 2009 lows is simply a reflection of the underlying volume weakness of the broad market and the fact that Smart Money has not been participating to the extent it has in previous, longer-term market advances.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL perked to a new high last week on both the Daily and Weekly Cycles. This action in conjunction with the upward bias of index prices is another suggestion that the overall tone of the rally that began after the July lows remains positive, albeit within the context of the poor quality of upside volume that has been evident for months.

Detracting from the overall favorable tone is the fact that both the Daily and Weekly Ratios for CPFL have moved into “overbought” territory. Nonetheless, mitigating in favor of further gains is the fact that such readings have often preceded actual tops by weeks. And given the fact that MAAD is currently “oversold,” we suspect that what we are seeing in the CPFL Ratios is a preliminary warning that an Intermediate-term high could be created within the next several weeks.

Click charts to enlarge

Conclusion

The major market indexes finished near even last week. The Dow Jones Industrial Average was off a touch relative to the previous week’s closing while the S&P 500 Index was up a notch. At the same time, MAAD remained flat on the week while our CPFL was up a bit.

As we noted in our commentary above, while the possibility remains that market prices could rally further, even better the late April highs by some margin, we continue to see the lack of upside volume as a major stumbling block to a longer-term continuation of this rally. In fact, strength since the early July lows reminds us of a classic ‘draw play” in which the quarterback pretends he is going to make a pass, but in fact hands the ball off to a running back who carries the ball forward, an apparent contradiction of the QB’s initial intent. Using that metaphor in this situation, weak players may continue to buy until stronger players note the inflection point at which they step in to sell. In any event, if the bride finally shows up for the wedding ceremony she may have wished she’d worn black.

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.