Is stock market rise a new bull or bear flutter?

Market Snapshot:

MAAD data collection changes somewhat due to inclusion of ETFs

Last week we received an email from a reader who said he was puzzled as to why the raw Most Actives Advance/Decline (MAAD) data he collects each day and each week that is based on our indicator is occasionally different from the raw MAAD numbers we report daily and weekly in our Futures commentaries.

When we began collecting NYSE 20 Most Actives data over two decades ago, a series which now includes data back into the 1960s, the securities listed on the “Big Board” accounted for the majority of all exchange traded volume. The retrieval process was straightforward and the raw data consisted almost entirely of NYSE equities with a few preferred stocks popping up occasionally. But the advent of Exchange Traded Funds, or ETFs, most of which track an underlying index like the S&P 500, has altered the Most Actives landscape.

At the Wall Street Journal a decision was made about three years ago to move all ETF listings to NYSE Arca where the data is comprised almost totally of ETFs. Yahoo Finance on the other hand combines daily NYSE listings with ETFs. On the weekly front, Barron’s combines NYSE and ETF data in its 20 Most Actives list. In other words, there are some reporting inconsistencies.

The first ETF, S&P Depository Receipts, or “Spiders,” was introduced in January 1993. But now there are more than 1000 ETFs traded on the NYSE Arca and another 100 on the NASDAQ. Many appear regularly in the 20 Most Actives daily and weekly lists we use to calibrate MAAD (see link at end of Weekly Market Summary to article we wrote in June 2009 relating to the construction and use of MAAD, “As Smart Money Goes, So Goes the Market”). In fact, for some market players ETFs are now “the market.”

Because these proxy issues are apparently here to stay and will continue to reflect a larger share of trading activity, our MAAD data collection includes the Daily 20 Most Actives extracted from the WSJ’s Composite list which comprises a universe of all exchange-listed stocks including NYSE Amex, plus ETFs. For weekly data we use Barron’s 20 Most Actives NYSE list that also includes ETFs.

Market Overview – What We Know:

• Further gains in primary indexes last Friday and last week solidified staying power of larger Intermediate Cycle that likely put in place a low via October 4 intraday bottom (1074.77—S&P 500).
• Volume in the S&P 500 declined by nearly 8% last Friday and by nearly 30% on the week despite net strength in prices.
• NASDAQ Composite Index rallied to new short-term high and above late August resistance on Friday.
• Intermediate Cycle Price Channel high (1232.07), good in S&P 500 through Friday, looms just ahead at level which can act as statistical resistance.
• Short-term Momentum and our proprietary Trading Oscillators remain positive, but all are in “Overbought” territory.
• Intermediate Cycle remains “Oversold” and in zone of opportunity.
• Major Cycle Momentum remains marginally negative in all of major indexes.
• Daily MAAD data rose sharply last Friday as did Weekly MAAD data. But Daily MAAD Ratio has returned to extremely “Overbought” levels. Weekly MAAD remains moderately “Oversold.”
• CPFL was fractionally positive Thursday and Friday, but on net basis indicator remains anemic to underscore lack of upside conviction by options players.

There are other issues relating to ETFs that need clarification. First, with the occasional inclusion in the Most Actives lists of ETF “short” issues that are a bet on a declining market, recording a “Pro Short” as a plus in a downtrend is a problem. While the ETF short is actually a long bet that rises in value as the “market,” for example the S&P 500, declines, the security upon which the ETF short is based is actually losing value. To correct this “error” we adjust all ETF shorts in terms of the underlying “issue bias,” the bias of the S&P 500 in this case. So we count the ETF short gain as a minus because the S&P is a loser. Or the ETF short loss as a plus when the S&P rises. ETF longs are not a problem because they move with the market.

But we are left with a conundrum -- even though the market has experienced a couple of weeks of strong gains following those August lows, will there be enough upside follow-through to not only overcome serious resistance beginning at 1255—S&P 500 up to the May high at 1370.58, but will there be enough buying power to sustain a rally to new highs? In other words, the market could be positive, but not. And there are reasons why not…

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

First, Cumulative Volume (CV) in both the S&P 500 and the S&P Emini futures contract has rallied with market prices, but neither series has performed as well as the indexes on the daily cycle. Also, both have some distance to travel before they break above interior plot resistance. Second there is the fact that short-term Momentum has moved back into extremely ”Overbought “ territory and is nearly as overextended on the upside as it was at the February, May, July, and August short-term highs. Our proprietary Trading Oscillators are also overheated. Third, while our Call/Put Dollar Value Flow Line (CPFL) has perked up a bit after hitting a new low last Wednesday, options players have essentially been AWOL during this recent rally.

The one big advantage the longs have at this juncture is that the larger Intermediate Cycle remains mostly “Oversold” and is in an historical zone of opportunity. It’s also true that in a countertrend bounce “Oversold” readings can be erased even with mere market neutrality. Put another way, if the market went into a lateral consolidation for the next few weeks, those "Oversold" stats could work back to neutral without much effort.

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, for the moment we suspect market action since the October low could prove to be a larger Intermediate Cycle reflex rally within the context of a still developing longer-term negative. We could see index prices work higher toward the upper edge of Major Cycle statistical resistance (see table below), but such strength would probably not be good enough to overcome the early May highs.

If we are correct current strength will falter this side of making new highs, we suggest that students of the market recall the July through October 1973 and the September through December 2001 countertrend rallies. Both were strong uptrends many at the time believed were begun after major market lows. But they were not and market gains proved to be no more than rebounding action in primary bear markets. We suspect this rally could prove to be similar.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD moved higher on both the Daily and Weekly cycles last week with the daily series coming within 25 issues of a defined downtrend line stretching back to the indicator’s early March high. While strength above the trendline would be bullish, its termination would still leave MAAD well below the March plot high.

The Daily MAAD Ratio has also moved back into extremely "Overbought" territory, an indication that some near-term price retrenchment could soon follow. Offsetting that possibility, the weekly series remains in "oversold" territory. In other words, if the market weakens in the face of "Overbought" price conditions and MAAD synchronizes with that selling by correcting its own near-term overheating, the Weekly MAAD Ratio would likely remain "Oversold" and in a zone of opportunity. Near-term price weakness could simply result in a pullback in the Weekly MAAD Ratio.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Options players remain a disgruntled bunch. After CPFL declined to a new Intermediate Cycle low last Wednesday, there was some marginal improvement in CPFL data on Thursday and Friday. But not by much. The indicator remains just a blink from new lows while reflecting the fact that options investors continue to view recent market strength with skepticism.

These doubts will play out in one of two ways. Either the market will ultimately move in favor of CPFL gloominess, or CPFL stats will begin to play catch-up with the market. In the meantime, we can only note again that we have never seen an instance where the market indefinitely defied CPFL by moving contrary to the indicator.

Click charts to enlarge

Conclusion

Market gains last week underscored budding Intermediate Cycle credibility on the long side. The question that now looms is obvious. Is recent strength the beginning of a resumption of the primary bull trend that began in March 2009 or is it merely a reflex rally within the context of an otherwise bearish longer-term trend?

At this juncture, we suspect the latter for reasons we have already outlined. In that context the biggest factors are deteriorating volume on strength, movement by short-term stats to "Overbought" territory, and massive resistance that looms overhead (1255-1370.58—S&P 500). While it’s true all of these obstacles could be erased if some new paradigm takes hold in the market, we still believe this rally will prove to be a bounce in a bear.

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.

Robert McCurtain is a technical analyst/market timer, private investor and financial markets consultant based in New York City. He is a member of the Market Technicians Association and can be reached at traderbob@nyc.rr.com.

If you would like to read more about how the CPFL is constructed, read a Futures article on the concept. This link will take you to the MAAD article.