Redemption or regret facing long investors in weeks ahead

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1215.65

-48.20

-3.81%

Dow Jones Industrials

11796.16

-357.54

-2.94%

NASDAQ Composite

2572.50

-106.25

-3.96%

Value Line Arithmetic Index

2631.78

-106.78

-3.89%

Minor Cycle
(Short-term trend lasting days to a few weeks)
Negative

Intermediate Cycle
(Medium trend lasting weeks to several months)
Positive / Neutral

Major Cycle
(Long-term trend lasting several months to years)
Positive / Neutral

If an investor has been holding nothing in his portfolio over the past year but the S&P 500 stocks, or a proxy for that index, he hasn’t made a dime. The S&P 500 index was last quoted about where it was in November 2010. Sure, the market has had lots of excitement over the past 12 months and astute traders have made money, but from a purely practical point-of-view the forces of supply and demand are about where they were a year ago.

As we noted recently, there are those who fervently believe the market will rally to new highs. We cannot deny that possibility, given the power of the upmove following the October lows and the fact the Intermediate and Major Cycles remain positive. Only the short-term trend is currently vulnerable. But even that smaller trend has largely corrected excesses since the October 27 S&P 500 intraday high at 1292.66. So the market may have simply been eliminating some near-term excesses within the context of a larger cycle advance.

Market Overview – What We Know:

  • Weakness at end of last week turned short-term trend negative, but within context of still positive Intermediate and Major Cycle trends.
  • Chart action over past few weeks could prove to be A-B-C pullback within context of larger cycle uptrend.Since "Neutral" readings currently evident on Minor Cycle can be followed by higher prices, it remains to be seen if Minor Cycle is closer to low than not.
  • To reassert Intermediate Cycle uptrend begun after October low (1074.77—S&P 500), S&P would have to better October 27 intraday high at 1292.66.
  • On downside, S&P could sink as low as 1138.76 and lower edge of 10-Week Price Channel without turning that larger cycle negative.
  • Most Actives Advance/Decline Line (MAAD) has remained in synch with broad market lately, but indicator on longer term has continued to underperform market, a suggestion Smart Money remains skeptical of longer-term stock market prospects.
  • Cumulative Volume in S&P 500 and S&P Emini was last trending lower with CV more negative in Emini than in cash S&P.
  • Call/Put Dollar Value Flow Line (CPFL) remains remarkably weaker than broad market and could sink to new lows with little additional effort.

On the other hand, some students of the market believe all strength since the October lows will prove to be merely a "return action" rally within the context of longer-term topping action. They site the fact the market must overcome major resistance stretching up to the May 2011 highs (1370.58—S&P) and the dramatic breakdown from Head and Shoulders Top formations in the major indexes in early August. They suggest market strength following the price breakdown is a classic return move which will not last.

Market Overview – What We Think:

  • While stock market, as measured by S&P 500, sold lower last week and confirmed short-term reversal to negativity, we wonder if Minor Cycle could be closer to an endpoint than at the start of more Minor Cycle negativity.
  • Fact that S&P 500 and major indexes have traced out what could prove to be A-B-C pullback within context of larger cycle positive could mean market countertrend action could prove to be shallow.
  • To prove the bullish point, however, S&P must hold above 1200 and then rally above 1292.66 at October 27 intraday high.
  • Issue then becomes longer term – will market be able to make new highs and will indicators confirm that action. Failure by one or both would underscore potential for longer-term bear. Simply put, 1370.58—S&P must be overcome to re-assert bull trend begun in March 2009.
  • With key indicators still exhibiting lackluster performance, we can only continue to wonder at market’s longer-term upside prospects since lack of indicator confirmation has never favored bullish case.

Of the two camps we lean more toward the latter bearish scenario for a variety of reasons…

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