Equity indexes sink to lows as indicators remain weak

Such is always the case in a downtrend of importance. But the question now is, just how important is this downtrend?

Some analysts continue to believe selling since the May highs is merely a blip in the primary bull that began after the March 2009 lows. They point to the fact that there is a huge pile of cash on the sidelines waiting to be invested in equities. And, given historically low interest rates, there is nowhere else to go except into equities. Could be. Other folks believe that selling has been serious, but after a bit more weakness, index prices will hold above major supports at the July 2010 lows, regroup, and then head higher to reassert the long-term bull. Also could be.

S & P 500 Index with Cumulative Volume

But we keep wondering why, if the market has so much upside potential, depending on which bullish point-of-view you adopt, the market’s underpinnings look so weak. We have continued to highlight the deterioration of our Most Actives Advance/Decline Line (MAAD) and the Call/Put Dollar Value Flow Line (CPFL) since a non-confirmation developed with both following the May highs. The actual plot highs were recorded in February. MAAD, especially, accelerated on the downside with Weekly MAAD fracturing its uptrend since March 2009 last week. CPFL did the same a couple of weeks ago. Adding to our concern with both indicators is the fact that each series is computed via entirely different data.

S & P 500 E-mini Futures contract with Cumulative Volume

And then there is our Cumulative Volume series that highlights the activity going into and out of the indexes. Currently, CV in the S&P 500, Dow Jones 30, and the NASDAQ (there is no reported volume for the Value Line Index) has returned to levels not seen since March/April 2009. There is also the fact that the bellwethers failed to make new CV highs after April 2010. Each also formed a classic Head and Shoulders Top following the February 2011 highs and then capitulated below defined “Neckline” formations on sharply higher volume a few weeks ago. Indeed the latter breakdown was textbook perfect.

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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.

So, while we remain open to all possibilities, we wonder from a purely practical standpoint, where is the evidence to suggest that this market is in merely a corrective phase that is preliminary to a resumption of the primary uptrend? Quite frankly, such assertions that the recent decline means little remind us of Adolf Hitler in the last days of World War II when the Fuhrer sat, isolated, in his bunker claiming that it was only a matter of time before the German army was going to “breakout” to destroy Allied armies. While we like “coming from behind stories” too, sometimes it’s a fact that Humpty-Dumpty won’t be put back together. At least, anytime soon….

McCurtain Most Actives Advance/Decline Line (MAAD)

A resumption of selling in the broad market last week pushed MAAD on the Daily Cycle to within inches of making new indicator lows. At the same time, Weekly MAAD data on a cumulative basis has declined below its major uptrend line stretching back to the March 2009 lows.

Clearly, Smart Money remains skeptical of stock market prospects even though index prices attempted a feeble, low volume rally back toward Price Channel resistance following the August 9 index lows. Simply put, they didn’t believe rebounding “strength.”

If MAAD continues lower, net, in the sessions just ahead and then fails to respond into an inevitable reflex bounce, we can only assume that the underpinnings of this market remain weak and that any strength on the upside could be undermined by an inevitable lack of confidence in pricing.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL declined to new short-term lows last week and has remained negative for 12 sessions in a row. Selling last Thursday was more than 5 to1 negative with Friday’s numbers negative by 2 to 1. In fact, options players seconded none of the small retracement rally following the August 9 lows. If that lack of confidence in the market continues as measured by CPFL, we can only presume that recent index price lows could remain under threat, despite apparent near-term “Oversold” conditions.

But it is the longer-term scenario that remains the issue. As we have pointed out before, we have never seen an instance where significant deterioration in CPFL statistics was defied by index prices indefinitely.

MAAD data for past 30 Weeks* CPFL data for past 30 Weeks

*Note: All data is for calendar 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.

Conclusion

The major stock market indexes lost ground again last week following a failed rally attempt on weak volume. That upside failure was not a surprise. And even though we could see prices stabilize above recent lows (1101.54—S&P 500) in the sessions just ahead to put in place a tradable Minor Cycle low, it wouldn’t take much more selling to take out the recent bottom, resume Intermediate Cycle negativity, and also force all of our key indicators to new lows.

We continue to view the market’s longer-term bullish prospects with skepticism, given the remarkable deterioration in Cumulative Volume not only since April 2010 and then into the May 2011 highs, but especially over the past several weeks as CV has declined to levels not seen since early 2009. CV deterioration has been amplified not just by S&P Emini futures (see chart) that have taken out the major support lows of March 2009, but also by the S&P 500, the Dow 30, and the NASDAQ Composite Indexes.

In sum, if we are wrong that the recent round of selling in the market is merely a pullback in a bull trend, then why have these indicators demonstrated such dramatic downward deterioration?

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.