Market, indicators sink, as major cycle momentum turns negative

What MAAD on all three cycles is currently suggesting is that not only is a major negative divergence currently extant between MAAD and the S&P 500, the broad market, but strength since the March 2009 lows in the wake of the devastating bear market in 2008 is highly suspect. Notice in the Monthly MAAD chart since the indicator peaked in May 1999 high with the S&P peaking in March 2000 how MAAD failed to confirm strength in the S&P twice on the major cycle. Despite price gains back to a slightly higher high in October 2007 (1576.07) vs. March 2000 (1552.87) in the S&P, MAAD failed into its July 2007 top by nearly 50% relative to the 1999 MAAD high. Again into the recent highs MAAD fell remarkably short by nearly 50% even though the S&P recovered 83% of its 2007/2008 bear market losses. In addition, while the S&P was able to exceed its May 2011 high at 1370.58 with the April 2012 high to 1422.38, MAAD failed there also.

Market Overview – What We Know:

• Broad stock market suffered major losses last week and pushed, on closing basis, S&P 500, Dow Jones Industrial Average, and Value Line index to new lows for year.
• Major Cycle Momentum turned negative after long-term advance last week for first time since January 2008. Reading is preliminary and requires monthly closing price in S&P 500.
• NYSE trading volume diminished by 2.2% on week, but that variance was due to fact trading week was truncated by one session for Memorial Day. If full trading week had been registered, volume would have risen on market negativity vs. previous week.
• Average Price per share declined 82 cents to $55.02 on week.
• Minor Cycle and Intermediate Cycles remain negative with both holding toward “Oversold” territory as measured by Daily and Weekly MAAD Ratios ( .70 and .47, respectively).
• S&P 500 must rally above upper edge of 10-Day Price Channel (1324.66—through 6/4) to suggest end of Minor Cycle downtrend. Intermediate Cycle suggests positive trend change at upper edge of Weekly Channel (1406.70 through 6/8).
• Daily CPFL was negative Friday by 3.77 to 1 and on week by 6.71 to 1. Indicator remains in short-term downtrend and is somewhat more positive than pricing, but it wouldn’t take much net selling to drive CPFL back below December short to intermediate-term low.
• Market sensitive Cumulative Volume (CV) moved to new minor lows in both S&P 500 cash index and S&P 500 Emini futures Friday. CV negativity in cash S&P suggests index should be trading about 50 points lower while S&P Emini CV indicates S&P should be about 100 points lower.

There is also another issue at play. Given the fact MAAD has not been enthusiastic on the upside since the March 2009 bottom, it is also much closer to making a new low below the 2009 nadir than the S&P. In other words, if more concerted market weakness develops, a sign Smart Money is continuing to exit this market, it wouldn’t take much to cause MAAD to make new lows. After diverging from market pricing for the better part of the past 13 years, MAAD may be doing now in reverse, and through distribution, what it did prior to the secular bull market begun in 1974 via accumulation.

Market Overview – What We Think:

• Sharp selling in stock market last week with new short-term lows in MAAD and CV with both suggesting the broad market should be selling much lower, are a sign the downdraft in this market may have more life.
• Although its true short and intermediate-term ratios are “Oversold,” if history is a guide, “Oversold” readings in a new downtrend can be more a reflection of market negativity than of a buying opportunity.
• Nonetheless, we know there will be a rebound in pricing at some point. Such short-covering “strength” could even develop this week, but we suspect any buying will serve more to eliminate deep negatives that will be replaced by “Neutral” to moderately “Overbought” statistics. In other words, caveat emptor.
• When a near-term rebound develops, the best we could see within the current intermediate negative would be gains toward 1400 and the upper edge of the 10-Week Price Channel in the S&P 500.
• Best guess on how far current intermediate negative could carry would be 1283-1213 if “normal” 40% to 60% pullback develops on Intermediate Cycle.
• Since majority of our key indicators did not confirm market strength into recent highs, more selling could be required to bring market pricing into line with negative indicator divergences.

At the left hand side of the Monthly MAAD chart note how MAAD bottomed with the broad market into the December 1974 lows. But also notice how the indicator did so at a much higher level after the 1960s run-up in equity prices that preceded a decade-plus market price consolidation. Once MAAD made its 1974 lows it popped to a new all-time high in December 1976 nearly 3 ½ years before the S&P followed suit by also making a new high in July 1980. What was the bullish MAAD divergence demonstrating? Quite simply, Smart Money was aggressively accumulating equities prior to the greatest bull trend in stock market history. Now, MAAD continues to suggest the secular uptrend begin in 1974 may have ended in March 2000.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

It’s a certainty current market weakness will give way to some reflex buying. There will be a short-term low. In fact, most of our near-term indicators continue to hold in “Oversold” territory, as do some on the larger Intermediate Cycle. At some point those readings will take hold. But it takes new money and strong upside volume to sustain a long-term trend and we wonder if such power will be forthcoming.

MAAD is not alone in its long-term skepticism. Our Call/Put Dollar Value Flow Line (CPFL) has remained notably unimpressed with market action since the 2007 highs and also since the May 2011 highs it has been unable to surpass, despite strength since last October’s lows. Since then, options buyers have remained only a bit more positive than negative on a weighted Dollar Value basis.

Daily S & P 500 Emini Futures contract with Cumulative Volume (CV)

Weekly S & P 500 Emini Futures contract with Cumulative Volume (CV)

Lastly, we’ve referred to long-term Momentum as an important statistical component. That indicator after peaking at 393.16 in March 2010 has steadily deteriorated over the past three years on the long-term trend. Via last Friday’s close, Major Cycle Momentum turned negative from a positive trend for the first time since January 2008 with a reading of minus 8.08. While that change based on a weekly closing price has yet to be cast in historical stone, because we need an end of the month close, it is nevertheless another sign this market’s underpinnings have not only been damaged by recent selling, but that price action which preceded this move has been less than stellar on a statistical basis. And we haven’t even talked about the poor showing in Cumulative Volume in both the cash S&P 500 and S&P 500 Emini futures contract over the past few years, both of which remain negative (see accompanying charts).

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.

In sum, if the 50 years of MAAD’s performance proves to have any prescience in terms of future stock market action, we suspect there is reason for concern. While many continue to think price action in the major indexes since the March 2009 price lows is part of a major bull market that will continue higher once the current intermediate term correction is over, we wonder if Major Cycle deterioration in MAAD since the 2000 highs is the reverse of the accumulation that preceded the great secular bull market that began in December 1974. If so, new highs will not follow, MAAD will make new lows in the not too distant future to suggest further Smart Money distribution, and the broad stock market could enter a very difficult period for investors remaining “long” equities.

McCurtain Most Actives Advance/Decline Line (MAAD)

The sharp deterioration in MAAD last Wednesday on renewed market selling preceded weakness to new lows in the S&P 500 below the May 18 interim low (1291.98). While both the Daily and Weekly MAAD Ratios have moved into “Oversold” territory, history suggests such readings should be viewed with some degree of skepticism since ratios can often “correct” internally even as prices move lower. What is happening is that even though the rate of downward decent in price is abating, the ratios are merely eliminating previously deeply negative numbers while being replaced with only slightly better numbers. As a consequence, a ratio like the Daily MAAD Ratio can actually rise as prices decline further.

More importantly, what MAAD has been saying since the October lows, let alone since March 2009, is that Smart Money has not liked this market to the same extent it liked price action prior to the 2000 highs. And as we mentioned in our main commentary, we wonder if those negative divergences and the proximity of MAAD to its 2009 lows could be suggesting something about the secular bull market that began in December 1974 and that may have ended in March 2000.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL was net negative last week and remains so on the short and intermediate trends. While the indicator is somewhat more positive than index pricing, it also wouldn’t take a great deal of selling to push CPFL below key support at its December 19 lows.

It is the failure of CPFL to confirm index pricing on the upside, however, that has remained the issue for months. After peaking in late February 2011, CPFL failed to confirm any of the strength in the S&P 500 since last October. In fact, CPFL sank to a new short-term low during the November/December 2011 pullback and even though the S&P 500 was holding substantially above its October lows.

The failure of CPFL to perform on the upside underscores the lack of commitment by options players. Not only have Call buyers on a Dollar Value basis failed to gain upside impetus, but for over a year they have only been able to offset buying of Puts on a Dollar Value basis with marginally better numbers.

Click charts to enlarge

Conclusion

Price action in the stock market last week could prove to be of watershed proportions. While it’s true short and intermediate-term “Oversold” conditions will ultimately “bite” enough to allow for a near-term rally, given the fact that MAAD, CPFL, and CV continue to look weak longer-term, we can only wonder why investors would want to be long this market. Moreover, given the fact Major Cycle Momentum provided a preliminary monthly negative reading in the wake of a major uptrend for the first time since January 2008, there is a pricing bias developing that may prove to be unfavorable to equities.

As we point out in our Market Summary, there may have been a major shift in investor behavior developing since the 2000 market highs, despite two strong rallies that followed the 2002 and 2009 market lows. What followed both as reflected by MAAD has been relatively lackluster participation from market players who tend to be “The Market.” Without their full participation on the long term, the environment of the stock market could develop, ultimately, into something quite unpleasant.

*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.