Housing, sentiment diverge on market signals

Put another way, since the major indexes put in place highs before the first really big correction of the move that lasted from the end of April until early July, strength above those levels has only resulted in a net gain in the S&P of 3.8%, in the Dow 30 of 3.3%, in the NASDAQ Composite of 5.1%, and in the Value Line Index of 7.0%. And those nine months are the same time frame during which gold rallied just over 35% while silver soared 109%. While we can debate the cause of the move higher in equity prices over the past year ad nauseum, the net gains in the stock market in the major indexes have been only a touch better than anemic.

So now we have a situation in which all three of the key cycles we follow, Short-, Intermediate-, and Major are “overbought.” Some will correctly suggest as we have stated before that “overbought” readings can stay that way, but at some point that Short-term Cycle, the one that has been working higher since the late November lows, is going to end. The extent to which that trend weakens will determine the staying power of the next larger Intermediate-term Cycle that has been underway for the past six months. And then the Major Cycle. In fact, we think it may only be a matter of days before the Minor Cycle rolls over to the downside as volume picks up when market participants are back in full strength. The big question will then be how that smaller cycle weakness will affect the next larger Intermediate Cycle and ultimately the Major Cycle.

In sum, some folks believe this market has a lot of room left on the upside. We’ll see, but for our money, we would feel a lot more comfortable if the market’s underpinnings were much more solid than they are now.

Note: Stop levels based on the trailing moving average price channels for the Highs or the Lows of an index presumes a continuation of recent market momentum and volatility. Stop levels should only be used as an entry or exit guide and in conjunction with other market strategies.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD rallied to a new high and its best levels since March 2009 last week on the Weekly Cycle, but that action was not confirmed on the smaller Daily trend which has yet to better its April 14 plot highs. While the discrepancy between the two time frames is now but a fraction, the divergence remains intact until the variance has been erased.

So long as market prices continue to move higher, we suspect MAAD will offer little more than it already has, despite strength in the broad averages. Simply put, MAAD, a reflection of the so-called “Smart Money” crowd, has failed to perform on the upside to the same extent is has performed in other historic bull moves. How that disparity will ultimately play out remains to be seen, but suffice to say that we have never seen an instance in the indicator’s history that it did not come back to haunt market prices if it underperformed relative to the market on the longer term cycle.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL rallied to new highs for the move last week on both the Daily and Weekly time Cycles. Options players continue to remain bullish on the stock market. Recent “Overbought” readings on the larger Intermediate Cycle have been correcting lower along with stats of the smaller trend. But overheated readings in this indicator have been notoriously inconsistent over time. On occasion they have coincided with market highs, but at other times they have had a wide lead.

So long as CPFL remains in synch with market action, we suspect the market could have a net upward bias, despite our overall longer-term concerns. If, however, the point comes when CPFL pulls back with the market and then fails to rally to a new high with prices, the odds of a continuation of the longer-term rally would substantially deteriorate.

Click charts to enlarge

Conclusion

Into light pre-New Year’s trading the major indexes were mixed last week. The S&P 500 Index and the Dow Jones Industrial Average rose less than 1% with the NASDAQ Composite and the Value Line Index falling less than 1%. The Short-term Cycle looks a bit “toppy,” a tone that has been underscored over the past several days by remarkably low volume on strength. That discrepancy could soon be resolved on the downside within the context of an Intermediate Cycle which is currently positive, but “Overbought” and “mature” to the extent the trend is now nearly six months old. The Major Cycle trend waits in the wings.

Net, we remain concerned by the internal dynamics of the market including poor upside volume, deteriorating momentum, and overheated readings on all cycles. How those trends ultimately unfold will determine whether “hats and horns” will be warranted in the first quarter of the New Year.

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.