Market positive, but vulnerable on minor cycle

“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” -- Mark Twain in Pudd’nhead Wilson

Keeping in mind Mark Twain’s quotation, we are currently ensconced about one-half way through the month of January, which is a “dangerous” month, and about 1/26th of the way through the financial New Year, which contains another 11 “dangerous” months. After two weeks of trading the S&P 500 Index was last ahead 2.8%, the Dow Jones Industrial Average was up 1.8%, the NASDAQ Composite was ahead 3.8%, and the Value Line Index was up 2.9%.

All cycles including the Short, Intermediate, and Major remain positive although all are in historically “overbought” territory. We say “overbought” with a caveat since history has shown that overheated readings on the upside can persist in a strong bull trend, just as “oversold” levels can linger in a powerful downtrend. We also know that the short-term uptrend that began after the late November lows remains positive, but is due for a breather as is the larger intermediate trend that began after the early July lows.

Playing in the background is another theme that we have mentioned often over the past several months. Cumulative Volume, which measures the overall input of market activity relative to prices, has been moving higher since the November lows on the short-term trend and since July on the intermediate. But neither cycle in the S&P 500, the Dow, or the NASDAQ has been able to overcome plot resistance made at the end of April when the market put in place an interim high just before the early May “Flash Crash.” In other words, volume damage was done to the market during that spring decline and the market has yet to recover from it on the volume front even though prices in the major indexes have rallied to new highs for the move begun after the March 2009 price lows. Simply put, CV continues to suggest that strength has been fueled by weaker players since late April and it remains to be seen if that variance could prove to be a longer-term negative.

In addition, short-term Momentum peaked in the S&P and the Dow 30 back on December 16 and in the NASDAQ and the Value Line on December 12. Momentum on both the Intermediate and Major Cycles made statistical highs months ago to suggest that the rate of ascent in this market, although positive, has not been as enthusiastic as it was during the early weeks and months of the longer-term advance.

Despite some statistical concerns, it is a fact that two of our key indicators, the Call/Put Dollar Value Flow Line (CPFL), a measurement of market sentiment using index options, and the Most Actives Advance Decline Line (MAAD), a gauge of Smart Money on the NYSE, have hit new highs along with the broad market indexes. While CPFL remains the most encouraging of the two, MAAD has also tagged along on the upside, albeit somewhat reluctantly.

In sum, we suspect that the short-term trend will probably succumb to smaller cycle selling pressures in the not too distant and will enter into at least a period of consolidation that will determine the staying power of the larger intermediate trend. Since it is inevitable that the intermediate trend will also yield up a neutral/negative signal at some point, the level at which that signal is generated will also determine the staying power of the Major Cycle.

Note: Stop levels, a function of the extant trend, are based on the trailing moving average price channels for the Highs or the Lows of an index and presume 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 entry and exit strategies.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD rallied to new highs and its best levels on both the Daily and Weekly Cycles last Friday and since the March 2009 stock market lows. While the indicator continues to demonstrate anemia relative to the broad market in that it has yet to recover as much territory since the major stock market highs in October 2007 as have prices, MAAD has nonetheless begun to demonstrate renewed life. While that strength could be a function of more big players returning to the market after the holiday season, we do know that MAAD has begun to look better after months of relative lethargy. The strength to new highs simply continues to underscore the net upward bias of the broad market.

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