Despite stock market rally, highs remain elusive

Remember that the 1969 song sung by crooner Peggy Lee, "Is That All There Is?" And then the 1984 Wendy’s advertising campaign in which actress Clara Peller asks the immortal question: "Where’s the Beef?"

Those two queries pretty much sum up our feelings about the short-term decline that began after the February 18 index highs and which led to a month-long decline that culminated in the March 16 short-term lows. During that time the S&P 500 Index lost 7.0% with the Dow Jones Industrials losing 6.7%. The NASDAQ Composite sank 8.3% and the Value Line Index faded 7.1%. But in the several sessions since the lows the market bellwethers have quickly recovered from one-half to two thirds of their losses since mid-February.

Which brings us to our follow-up question? If the highs on February 18 were the top of the Intermediate Cycle advance that has been in effect since last summer’s July/August lows, then where’s the downside conviction? Where’s the beef?

While admittedly it’s still possible buying over the past several days could prove to be a "return action rally" following the creation of an Intermediate-term high, strength back above those February highs at 1344.07—S&P, 12391.30—Dow 30, 2840.51—NASDAQ, and 3072.86—Value Line would not only toss the Intermediate Cycle top thesis out the window, but buying would simply re-assert the primary uptrend.

This side of there, however, there are some "buts." First, while the broad market has done well for the better part of the past two weeks, short-term Momentum has merely returned to neutral. Considering the fact that a retracement of previous losses can be followed by a 40% to 60% retracement is classic, the market is simply on schedule if this short-term move is a short-covering rally. At the same time, Intermediate Cycle Momentum has hardly budged on the upside, despite strength, with plots in all of the key indexes now hovering just notches above "zero" lines and negativity.

There is also the Cumulative Volume issue (see Chart below). Not only has CV in the S&P 500 Index continued to highlight a major disparity between index pricing and investor activity by not rallying above the April 2010 plot highs, but recent price weakness has positioned CV on the long-term trend not far from and uptrend line stretching back to the March 2009 indicator lows. In other words, it wouldn’t take much net selling for CV to fracture that defined trendline, a development that could put downward pressure on index pricing.

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But there are also a couple of bright spots on the horizon. While our Call/Put $Value Flow Line peaked back on February 25, there has been little concerted options selling since then. The indicator only backed off by 2.9% in the month-long decline. That downside reticence means that not only do options players apparently regard recent index weakness as a small blip in an uptrend, but it would not take much net call buying to push CPFL to new highs. It is also a fact that while the Intermediate Cycle has been recently challenged, it nonetheless remains positive as does the most important Major Cycle.

In sum, the market is currently locked almost midway between its February highs and the short-term lows created several days ago. If the former are penetrated via a resumption of buying and new highs follow, so much the better for the bullish camp since the long-term uptrend would be re-asserted. On the other hand, if the recent lows are fractured on renewed selling after a nominal retracement following what could be the creation of an Intermediate Cycle high, we would look for renewed weakness and possible selling toward Major Cycle Price Channel support levels (see table below). Of the two scenarios, strength to new highs or a resumption of Intermediate-term selling, we’re currently leaning 60/40 toward a failed rally and a resumption of weakness.

For now, it seems those old song and advertising lyrics have switched to the extent bears can now ask the bulls "is that all there is" and "where’s the beef?" This issue should be settled within the next several days.

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. Whether or not a specific index is suggesting a "Buy" or Sell" is determined by whether or not index prices are above or below the current channel Stop levels. 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)

While prices in the major market indexes have improved modestly over the last several days following the March 16 lows, the Most Actives Advance/Decline Line (MAAD) has demonstrated little upside impetus and was last holding slightly below an uptrend line that stretches back to the late August "test" lows. That lack of enthusiasm by the so-called Smart Money crowd suggests that while the market continues to work off some of its "oversold" tendencies since the recent lows, such near-term buying may not have the internal backing necessary to cause the upside follow-through necessary to create new highs in the major indexes.

In short, while index pricing could make a decent stab at the mid-February highs what could be lacking is corroboration from MAAD. As we have noted in the past, when this indicator is out of synch with the market, in this case on the upside, a negative disparity would be evident. Given such a divergence, history has shown that the market has usually moved in the direction of MAAD.

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