Stock market reasserts uptrend but volume lacking

Finally! The bellwether indexes rallied back above their late April price highs last week to confirm a resumption of the bull trend that began after the March 2009 lows. The S&P 500 Index, the Dow Jones Industrial, Transportation, and Utility Averages were all trading above the April levels along with the Value Line and NASDAQ Composite Indexes. Only the S&P 100 Index and the Russell 2000 have yet to confirm.

At the same time, our Call/Put Dollar Value Flow Line (CPFL) on both the Daily and Weekly Cycles reached new highs along with our Most Actives Advance/Decline Line (MAAD) on the Weekly Cycle. Daily MAAD has yet to make a new high, but is positioned for an upside break.

But one important “player” has yet to show up for the rally: Volume.

Over the past several months we have alluded to the fact that Cumulative Volume, a reflection of market activity as related to price action, has substantially lagged higher prices as the rally that began in early July accelerated. In the below chart notice the relationship of price action in the S&P 500 Index to the Cumulative Volume chart. While CV kept pace with S and P prices following the March 2009 lows, even accelerating higher as the rally gained steam, after the January 2010 short-term price highs were reached CV began to loose upside momentum. Prices rallied smartly off of the February lows into the April 2010 highs, but CV held back. Then came the mini-Crash in May and CV took a big hit. In fact, the indicator faded back to levels equal to S&P price levels not seen since April 2009. Then came the rally following the July lows that has finally resulted in strength to the best levels since March 2009 lows over the past few weeks. But CV continues to hold nearly 50% lower.

Click chart to enlarge

So what are we to conclude from this disparity between prices and volume? Simply put, the only logical conclusion is that the “quality” of buying has been diminishing since last January’s highs and strength off of the February lows. Since the July lows strength was fuelled by weaker players. Making the mix even more unsettling, the May/June selling spree was encouraged by determined sellers.

With the uptrend now re-asserted because of bids back above the late April highs, the market has re-adopted a more favorable tone. But the problem is, on an historical basis, deteriorating upside volume does not play out well on the longer-term, the major cycle. The divergence into the October 2007 market highs, also evident in the attached charts, demonstrates how two short-term rallies preceding the 2008 bear market were clues that upside volume was failing.

In sum, the bulls are currently in control of this market. More gains could follow, but to use a sports metaphor, we continue to wonder, given the poor showing in our Cumulative Volume numbers if the game is being carried forward by players on the second or third team, not the first string.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD rallied higher last week, but only plots on the larger Weekly Cycle reached new highs relative to the late April levels. Daily MAAD stats continue to lag to the extent they have not made new highs, but the series is positioned to follow through on the upside. While we wonder at the divergence between Daily and Weekly data, and considering our earlier commentaries that Cumulative Volume remains poor, we nevertheless suspect Daily MAAD will make a new high relatively soon. If the indicator does not, then we would have to begin admitting that the internal tone of the market is reflecting negative divergences.

So we are left with a conflict between the more sensitive Daily Cycle data and the more significant Weekly MAAD Cycle with the hint the divergence will be resolved favorably.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL rallied to new Short and Intermediate Cycle highs last Friday and on the week. Weekly CPFL statistics are currently at their best levels since the fall of 2008 with the potential offered for further gains since the Daily CPFL Ratio remains modestly “oversold.” The Weekly CPFL Ratio is “overbought,” but as we mentioned last week that series has had a tendency to lead the market in past cycles.

So long as CPFL continues to work higher while confirming market gains, we suspect that the overall tone of the broad market will remain positive, poor broad market volume numbers notwithstanding.

Click charts to enlarge

Conclusion

The S and P 500 Index posted a 42.59 point gain last week, or 3.5%, with the Dow Jones Industrial Average up by 325.59 points, or 2.9%. The Value Line Index along with the Dow 20 and 15, and the NASDAQ Composite Index were also trading at their best levels since March 2009.

While higher prices are certainly an encouraging sign for the bullish camp, the failure of market volume to spur Cumulative Volume numbers to new highs along with prices is worrisome since we have never seen an instance in stock market history where poor volume did not ultimately come back to haunt the market.

While not all major market reversals have been preceded by divergent action in CV, we have never seen an instance where market action did not move in the direction of the CV once the disparity was put in place. If CV does not improve to follow the “lead” of market prices, we suspect prices will ultimately follow the negative CV lead and move to the downside.

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

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

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

8-20-10

8

12

8-20-10

176830

488032

8-27-10

6

14

8-27-10

207995

222943

9-3-10

17

3

9-3-10

488323

102016

9-10-10

12

7

9-10-10

287697

82863

9-17-10

15

5

9-17-10

289703

112410

9-24-10

12

8

9-24-10

209124

100570

10-1-10

9

11

10-1-10

145020

121894

10-8-10

14

6

10-8-10

394156

98483

10-15-10

10

10

10-15-10

476975

115923

10-22-10

11

9

10-22-10

2575024

116468

10-29-10

10

10

10-29-10

376133

120924

11-5-10

13

7

11-5-10

547056

71345



*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

9-23-10

6

14

9-23-10

17041

13044

9-24-10

18

2

9-24-10

32460

13474

9-27-10

10

10

9-27-10

13820

9855

9-28-10

13

7

9-28-10

20971

14665

9-29-10

7

13

9-29-10

18897

6022

9-30-10

8

12

9-30-10

28029

12528

10-1-10

18

2

10-1-10

17478

6476

10-4-10

7

13

10-4-10

25223

8818

10-5-10

19

1

10-5-10

78970

27351

10-6-10

9

11

10-6-10

33902

9810

10-7-10

7

13

10-7-10

92598

4234

10-8-10

12

8

10-8-10

102074

12642

10-11-10

10

10

10-11-10

108223

18879

10-12-10

15

4

10-12-10

22624

16689

10-13-10

9

11

10-13-10

106471

12181

10-14-10

8

12

10-14-10

31758

8467

10-15-10

2

17

10-15-10

263380

37882

10-18-10

9

11

10-18-10

74440

22047

10-19-10

6

13

10-19-10

244564

76604

10-20-10

12

8

10-20-10

35040

32917

10-21-10

7

13

10-21-10

33737

31632

10-22-10

8

10

10-22-10

20998

20664

10-25-10

11

9

10-25-10

17826

36728

10-26-10

11

8

10-26-10

18462

22227

10-27-10

10

9

10-27-10

39486

23322

10-28-10

8

11

10-28-10

187396

20725

10-29-10

8

11

10-29-10

19943

32281

11-1-10

10

8

11-1-10

32748

43173

11-2-10

8

11

11-2-10

53000

26682

11-3-10

12

7

11-3-10

51603

27749

11-4-10

14

6

11-4-10

178789

37602

11-5-10

10

10

11-5-10

170900

27121



*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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