Market reaches new highs but rally lacks substance

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1344.90

+28.57

+2.17%

Dow Jones Industrials

12862.23

+201.73

+1.59%

NASDAQ Composite

2905.66

+89.11

+3.16%

Value Line Arithmetic Index

3017.34

+100.84

+3.45%

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

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

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

“It would be so nice if something would make sense for a change.” Alice in Alice in Wonderland.

How apropos old Alice’s statement is to the current stock market. But to hope for such a denouement in Equityville is a lot like believing some financial journalists will ever stop using the word “uncertainty.” It ain’t gonna ever happen. Nothing in the market will ever make absolute sense and there will never be absolute certainty. That’s a certainty.

Last week was no exception. While Facebook began casting about for several billions in a May stock offering complete with CEO Mark Zuckerberg’s tieless Gap look, the major stock market indexes perked higher on so-so trading volume. Erasing some uncertainty, the NASDAQ Composite index rallied to a new high (2905.66) above its May 2011 peak (2887.75), a move that was given sympathetic confirmation by our Daily Most Actives Advance/Decline Line (MAAD) even though the latter is more appropriately compared to the S&P 500. No matter, because that was about it for the new highs last week as can be seen in the table below. Of 14 possible indexes and indicators we regularly follow, only two of the 14 bettered their May 2011 highs.

Key indexes / indicators relative to May 2011 highs

Index / Indicator

New high above May 2011

S&P 500

No

Dow Jones Industrials

No

NASDAQ Composite

Yes

Value Line index

No

MAAD Daily

Yes

MAAD Weekly

No

CPFL Daily

No

CPFL Weekly

No

S&P 500 CV Daily

No

S&P 500 CV Weekly

No

S&P Emini CV Daily

No

S&P Emini CV Weekly

No

S&P Momentum Daily

No

S&P Momentum Weekly

No

Of course, there’s no denying that the S&P 500 that was last just 25.68 points or 1.87% from equaling its May 2, 2011 high at 1370.58. Or the venerable Dow that came within 6.06 points of equaling its 2011 high at 12876. Moot point indeed. But it is not these price highs that we continue to worry over. As we’ve pointed out over the past few months even though we admittedly doubted the ability of the major indexes to make new highs, it’s the status of the underlying indicators we follow that is the problem. While it could be argued these indicators are making exceptional failures to the extent the market has far outperformed them and that this time the barometers simply “goofed,” we doubt it. In fact, via last weeks two “yes” votes, while Daily MAAD rallied a few notches above its March 3, 2011 high, Weekly MAAD has not confirmed that strength. And while the NASDAQ Composite made a new high, price action in that index looks very “spikey.”

Underscoring tepid MAAD strength, our Call/Put Dollar Value Flow Line (CPFL) remains anemic on both the Daily and Weekly cycles. While CPFL was shown some improvement over the past few weeks, the indicator has yet to better first resistance back at the late October highs, let alone come anywhere near the late February 2011 highs the indicator made two months prior to the May 2011 highs. The current upside failure in CPFL could prove to be no historical exception to the extent options buyers remain unimpressed with the potential for a long-term stock market rally. Are they missing something? Maybe not.

And then there is volume. As we noted earlier, trading volume during January ran at about half of normal recorded activity during the first weeks of 2012 compared to the early weeks of the previous several years. In fact, trading volume in January 2012 was about one half of what it was in January 2011. “So what?” you say. “Prices still moved higher.” True, but the issue is not now whether prices have moved higher, but will they continue to do so? It takes volume to sustain a rally.

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