Stock indexes undecided amid tentative internals

Twenty-five months ago the stock market began a retracement of the losses suffered in the 2007/2008 bear market. Since the lows of March 2009 the S&P 500 Index has rallied 99% with the Dow Jones Industrial up nearly 87%, The NASDAQ Composite index has rallied 119% while the Value Line Index gained 208%.

But it’s interesting to note that nearly 80% of the gains in the four major indexes cited above occurred during the first 13 months of the new bull move from March 2009 to the Intermediate highs put in place April 26, 2010. And since those April highs a year ago the S&P has tacked on 9% with the Dow and the NASDAQ adding 10% each. The Value Line which is up just under 14% since April 2010.

So what’s the point?

Fact is, this market has been losing upside Momentum over the past year. Underscoring that bias is the fact that Cumulative Volume peaked in April 2010 and CV in none of the major indexes has bettered that high since then. In addition, Major Cycle Momentum also peaked in all four indexes in April 2010 with no subsequent movement back above those plot highs. As we noted in a recent comment, Momentum on an historical basis can top out about one half way into a major trend. Or it can create a statistical low one half way into a long-term bear move as was the case in the 2007/2008 decline.

So here we are yet again fussing around near recently made highs. Two weeks ago the Dow 30 and the Value Line Index reached their best levels since March 2009. The S&P and the NASDAQ Composite failed. At the same time, Cumulative volume over the past three weeks following the mid-March lows has simply been pathetic (see chart below). Not only has CV failed to rally back even 50% of the decline since the February highs, but it wouldn’t take a lot of concerted selling to push the indicator, at least in the S&P, below a defined longer-term uptrend line that stretches back to March 2009.

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Besides poor CV and Momentum numbers, our short-term Trading Oscillators have moved back into "Overbought" territory and to levels equal to readings not seen since the highs last November and again in February. At the same time, Momentum on the larger Intermediate Cycle has demonstrated little upside impetus over the past three weeks and could slip into negative territory with relative ease if prices move decidedly lower.

We are also concerned by the status of our Daily Most Actives Advance/Decline Line (MAAD) that peaked back on March 3 and which has demonstrated virtually no upside enthusiasm since the March lows. The Daily MAAD Ratio was last moderately "Overbought." Somewhat countering the more sensitive daily numbers, Weekly MAAD moved higher last week to equal its highs made the week of February 18.

In a nutshell, there are some negative possibilities wafting about, but here’s the thing -- pricing in this market has steadfastly refused to acknowledge the negative tendencies of some of these indicators for the better part of a year. CV and long-term Momentum are two notable examples. And not only have prices demonstrated little inclination to pullback in earnest since last July’s Intermediate Cycle lows, but they have added insult to injury by making new highs for the move since December when the April 2010 peaks were eclipsed.

In conclusion, we must continue to point out the negative divergences with the suggestion that market history has shown such disparities eventually tend to prevail. In the meantime, the prudent investor remains aware of the negative tendencies in the indicators and hedges his bets by tightening Sell Stop levels in the event the larger cycles capitulate. One way to do that is to closely monitor our Price Channel Sell levels (see accompanying Table). Put another way, indicator negativity will probably continue to make itself known in the weeks ahead, but we cannot rule out the possibility that higher prices could continue to evolve even though the market’s upside Momentum is not what it was early into this bull move.

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)

The Most Actives Advance/Decline Line (MAAD) on the Daily Cycle has demonstrated little net improvement over the past three weeks after peaking back on March 3, declining until March 22, and then recovering about 50%. That recovery is despite the fact that most of the major market indexes recovered nearly all of their losses since the February highs.

While it’s also true that the larger and less sensitive Weekly MAAD has moved back to equal its highs made mid-February, the smaller cycle Daily MAAD is more sensitive to short-term market strength and weakness.

As that Minor Cycle indicator now sits, if the broad market rallies to new highs, Daily MAAD may have difficulty confirming that movement. That negative divergence could be an early sign that Smart Money has begun to suspect the recent bullish bias of the market could be faltering. If, however, MAAD of the weekly cycle does hit a new high, there would be an internal divergence in the indicator which would have to be resolved.

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McCurtain Call/Put Dollar Value Flow Line (CPFL)

The Call/Put Dollar Value Flow Line (CPFL) peaked on the Minor Cycle back on February 25. There was a minimal downdraft in the indicator into its lows on March 23, but the overall corrective action of CPFL relative to the broad market was negligible during the month-long drawdown in index prices. At the same time, and despite the fact that most of the major indexes recovered the lion’s share of their losses since the February highs over the past three weeks, CPFL, like MAAD, has only recovered about 50%.

The downside failure after the February highs was bullish since it suggested options players were skeptical of market weakness. But on the other hand, the recent failure of the indicator to corroborate market strength is an indication options players are not all that convinced about the upside either. As a consequence, CPFL remains range bound as the options crowd tries to make up its collective mind what it thinks about this market. Ultimately, if the recent negative divergence persists, that action would not bode well for index pricing.

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