With stocks near May highs, indicators dragging

So, you might ask, is the stock market currently doing a déjà vu all over gain as compared to the highs of 2007? In 2007 prices hit highs in July and October, but Cumulative Volume failed to confirm the second high. Similarly in 2011 prices put in place a high in February with a higher high in May that was also not confirmed by Cumulative Volume. Similar divergences developed in our Call/Put Dollar Value Flow Line (CPFL) and the Most Actives Advance Decline Line (MAAD) in both time periods. In 2007 CPFL topped out in June with MAAD finalizing its run in July. Recently, using daily data, CPFL reached its best level since March 2009 in late February with MAAD peaking in early March.

But is it possible a resumption of Intermediate Cycle buying could wash away the negative disparities in Cumulative Volume, CPFL, and MAAD, given the fact that index prices have moved back within striking range of the May highs and the best levels of the bull move? Yes, it’s possible. But is it likely? Probably not. If new highs do evolve the most likely scenario would be to expect that none of those key indicators would confirm price strength. If they did fail it’s possible a negative divergence could persist until the market ultimately puts in place a major peak.

We mention this latter possibility of new highs without indicator confirmation since that’s the scenario which developed into the 2000 highs. Into that earlier bull market high MAAD peaked in late May 1999, nearly 9 months before the ultimate highs in March 2000, and nearly 14% below the final price peaks. CPFL made new highs with the market, but then failed dramatically on a retracement move into September 2000 that preceded major selling. Cumulative Volume into the 2000 highs mimicked CPFL in that it made highs with the broad market and then moved sharply lower as selling accelerated.

S & P 500 Emini Futures contract with Cumulative Volume

The important thing to remember about these indicators is that they shouldn’t be "bought" or "sold," as such. They are simply tools to gauge the overall health of the market. If they exhibit deterioration then an investor should presume that a Yellow Flag of caution is waving. Protective stops and close monitoring of long positions should be exercised. On the other hand, if the indicators are moving higher and are in synch with market prices, an investor should remain observant but with less urgency.

But a laid back attitude is not warranted in this current environment. Using different data, CV, CPFL, and MAAD have been suggesting for months that the net internal bias of this market has been unfavorable for months, the potential for new highs notwithstanding. As we mentioned earlier, indicator negativity could be erased. Such eliminations have occurred before and they could occur again. Underscoring that potential, the NASDAQ Composite index came within .3% of equaling its May 2 high last week with the S&P 500, Dow 30, and Value Line index not far behind.

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