Stock bulls prove their point, but without full participation

Market Snapshot:

Well, that’s that…. Sharp gains last Tuesday propelled the S&P 500, Dow Jones Industrial Average, NASDAQ Composite index, and the Value Line index to new short to intermediate-term highs. Strength pushed index prices above the upper edge of 10-Day Price Channels, eliminated a possible Key Reversal Day created February 29 in the S&P and the Dow 30 and created new short-term highs in Cumulative Volume in the S&P 500, S&P Emini futures contract, Dow 30, and the NASDAQ Composite.

Action, which, of course, leaves us with the same dilemma that has persisted for the better part of the past five months – index pricing moving higher while a number of our key indicators have lagged or have simply failed to confirm strength. Notable amongst these is our Call/Put Dollar Value Flow Line (CPFL) that has been perking a bit higher since the December 19 lows, but that has gotten nowhere near that indicator’s 2011 plot highs to reflect the lack of upside enthusiasm by options players, folks who have historically exhibited market prescience.

At the same time, while the S&P, Dow 30, and the NASDAQ Composite have rallied above their respective 2011 price highs, the overall quality of the rally has been limited to the bluer chip issues to the extent that second tier equities as represented by the Value Line index and the Russell 2000 have not overcome 2011 resistance. At the same time, bids in the Dow Jones Transportation Average, a key component of the venerable Dow Theory, have also lagged.

Market Overview – What We Know:

• Major indexes rally to new short to intermediate-term highs Friday and on week.
• Short and Intermediate-term trends remain positive, but “Overbought.”
• Trading Volume in S&P 500 rose by nearly 14% Friday while average share price on NYSE declined to $58.79 from $61.48.
• Based on price, both Minor and Intermediate Cycles remain “Overbought.”
• Short-term Momentum has confirmed none of recent strength in any of major indexes to new highs for the move.
• Cumulative Volume in S&P 500 and S&P Emini futures contract both rallied to new short to intermediate-term highs Friday, but neither series has been able to overcome 2011 highs.
• Daily Most Actives (MAAD) was even Friday with 10 issues up and 10 down. Daily MAAD Ratio remains marginally above “Neutral” at 1.43. Weekly MAAD Ratio remains “Overbought” at 2.09.
• Via strength in Weekly MAAD, indicator has overcome resistance in downtrend line stretching back to October 2007, but not downtrend line extending back to May 1999.
• Daily CPFL was positive Friday by 3.13 to 1 on Dollar Value basis and hit new short-term high. Weekly CPFL was positive by 4.33 to 1.But neither Daily nor Weekly CPFL is anywhere near overcoming major resistance at 2011 indicator highs.

But no matter, “The direction of prices has been decidedly up since last October and we’ve made money,” some say. And they are correct. Even if some price measurements have lagged the S&P. Dow, and NASDAQ, long investments made in the Russell 2000 have still profited.

There is also another truism in play, however -- this rally will end. All rallies end and this one will be no exception. But the fact is, while weakness that followed that potential Key Reversal Day on February 29 resulted in a short-term pullback, the larger and more Intermediate Cycle that has been positive since just after the October lows remained untouched. And while the intermediate trend is also in historically “Overbought” territory, history shows that “Overbought” can stay that way for an extended period of time. It is only a statistical reversal from upside extremes that will ultimately signal a change in the intermediate trend to negative. Preceding that larger cycle reversal the Minor Cycle will first act.

Then there is Cumulative Volume (CV). As we have noted, CV in the S&P, Dow 30, and NASDAQ has consistently failed to equal the gains in the underlying indexes. That lack signifies poor participation. In fact, exchange volume is at its lowest point in nearly a decade.

So, you say, “It’s obvious the market is being buffeted by a variety of statistical cross currents. Some like price are positive and others including key indicators remain ‘reluctant.’ What’s to be done?”

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

We suspect the key to this market will remain the same as it has always been. If an investor is fully long he carefully monitors defined downside Stop Sell levels. For that discipline we use the lower edges of trailing Price Channels as exit points. The Minor Cycle kicks off the exiting. No shorts are entered, just exits on a small percentage of the long position are made. If the market heads higher as it did recently and after the Price Channels were challenged on the Minor Cycle, more longs can be added to the extant long positions.

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.

But if the short-term trend begins to give way on the downside to the extent the next larger Intermediate Cycle Price Channels are in jeopardy, a more aggressive exit strategy is warranted. And then, when the Major Cycle confirms a negative reversal that is followed by a failed rally back toward the most recent highs, final exits or short sales would come into play. The whole procedure becomes one of cyclical “context” regardless of whether an investor is buying or selling. In that vein, the current “context” suggests a long bias with focus on the Minor Cycle that will turn negative first. Then the Intermediate Cycle. And then the Major Cycle.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily and Weekly MAAD data rallied to best levels since October last week. But while Daily MAAD has bettered plot highs put in place in early March 2011, the Weekly series has not. While it’s true Weekly MAAD rallied above a defined downtrend line stretching back to the July 2007 indicator highs last week, the S&P bettered similar levels a month ago. Weekly MAAD also has yet to overcome a very long-term downtrend line extending back to May 1999 while the indicator remains “Overbought.”

Trend lines aside, it is the variance between Daily and Weekly MAAD to the extent one has made a new high and one has not that is the issue. Since the Daily series tends to be a bit more sensitive on the short-term cycle, the lack of confirmation by Weekly MAAD is simply lingering evidence that the Smart Money crowd continues to look askance at the long-term trend, DESPITE index price gains. In other words, they have been willing to participate on the long side, but not to the same extent they bought rallies in the great bull market from 1982 to 2000.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL has been demonstrating some life over the past several weeks, but given the proximity of Daily and Weekly CPFL plots to the downtrend line stretching back to February 2011 and the actual highs made that month, the indicator continues to look anemic.

While there is no denying the power or the profitability of the price moves since the October lows, the fact that options players as measured on a Dollar Value basis have only been buying a few more calls than puts for the past five months only makes us wonder at what point their reluctance will play out in the general market. Given the lead times of CPFL relative to the market, it’s possible more price gains could follow, but suffice to say we have never seen a time in the nearly 30 years the indicator has been computed that prices were able to defy CPFL reluctance indefinitely.

Click charts to enlarge

Conclusion

The major stock market indexes including the S&P 500, Dow 30, NASDAQ Composite, and the Value Line index rallied to their best levels last week since the October 2011 lows. Our Daily Most Actives Advance/Decline Line (MAAD) confirmed that action by also rallying above its 2011 highs. But Weekly MAAD did not. Nor did Cumulative Volume (CV), or the Call/Put Dollar Value Flow Line (CPFL), or Momentum on either the Minor or Intermediate Cycles, or pricing in second tier stocks listed in the Value Line index and the Russell 2000.

So, strength looks as if it is being limited mostly to top tier and “chips” of a bluer caste. With the volume underpinnings of this market still less than stellar and with the Minor and Intermediate Cycles still “Overbought,” it seems this market is one that remains more for the bulls to lose than for the bears to win.

**Note: Unchanged issues are not counted.

*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.