Stock market rally last week likely more frosting than cake

First, our Daily Most Actives Advance/Decline Line (MAAD) rallied with the market over the past several sessions, but it did so with little upside enthusiasm. Currently, while the S&P 500 is bid near 1325, Daily MAAD was last at a level equivalent to an S&P price of 1260. In other words, Smart Money bought equities off of the recent short-term low, but their actions do not look convincing in terms of suggesting a sustainable rally like the one they participated in after last October’s bottom. In addition, Daily MAAD is nowhere near breaking the downtrend it created after its late March highs nearly two weeks before the S&P topped. At the same time, the Daily MAAD Ratio has moved back to “Neutral” territory (last at .92) into an area that could be preliminary to a set-up before more Intermediate Cycle selling. If anything, the market will only become more vulnerable on the near term if those shorter term statistics wind tighter in the sessions just ahead.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

Second, on the volume front, while trading picked up a little after the four day Memorial Day week, trading numbers last week were still holding somewhat below average. We have also noticed that when the market sells lower, volume tends to pick up as compared to rallies when volume diminishes. That is not a good sign, because it means rallies are not attracting new buyers while weakness is reflecting distribution. Cumulative Volume (CV) has been keeping pace with S&P 500 prices, but considering the longer-term negative implications of CV over the past few years that coincidence is no reason to bring out the hats and horns.

Third, Momentum on the short-term has also tended to mimic our Minor Cycle Trading Oscillators by moving back to “Neutral.” Intermediate Cycle Momentum in the S&P remains moderately negative while S&P Momentum on the Major Cycle was last marginally negative, despite last week’s strength.

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

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

And last, on the charts, S&P 500 pricing was last back in the vicinity of its 200-Day Exponential Moving Average after toying with that level over the past few weeks. We don’t attach any great significance to that 200-Day area, but a lot of people tend to think 200-Day lines are important to the extent they seem to provide long-term support in downtrends and major resistance in uptrends. Whether they do, or not, it is a fact that pricing can tend to “cluster” around those levels on occasion. That’s what’s happened recently with this market, but as we suggested earlier, we do not think that bias will last much longer.

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, the stock market got a little boost last week, but we think gains were more a function of short-covering from deeply “Oversold” near-term conditions that finally began to take hold. With “Neutral” readings now in evidence, we suspect only a modest amount of strength would be followed by a near-term high that could then be followed by a resumption of selling on the larger Intermediate Cycle. A resumption of selling could result in new short-term lows in the major indexes with the S&P 500 selling back below its June 4 low at 1266.74. If we are being too pessimistic, we are certain nothing but new highs back above the March/April price highs (1422.38—S&P 500) would re-assert the Major Cycle uptrend.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD rebounded with broad market last week. And while Daily MAAD Ratio has moved upward from deeply “Oversold” conditions, “Neutral” readings have quickly evolved. The reason that bias is a problem is that in the early stages of a bearish trend, short-term “Neutral” is an approximation of “Overbought” in a bull trend. In fact, it wouldn’t take much more buying and net market strength to push the Daily MAAD Ratio to “Overbought” levels and extreme vulnerability.

The Weekly MAAD Ratio is in “Oversold” territory, but that indicator has a tendency to behave just like the smaller cycle Ratio to the extent “Oversold” early in a move may not be all it seems. In fact, during the early stages of the bear move after the October 2007 market highs, the Weekly MAAD Ratio dipped to “Oversold” several times, recovered to “Neutral,” and then moved lower until the final lows were put in place March 2009.

“Overbought”/”Oversold” conditions are helpful to the extent they can provide some measurement of market “temperature,” but to use them as absolute zones from which to buy or sell can be risky.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL was net positive last week, but once again without enthusiasm. The indicator has remained in a short-term downtrend since peaking back on April 9 and in a longer-term downtrend since reaching a high February 25, 2011. What is most worrisome about CPFL is that while the indicator rallied for part of the advance off of the October 2011 lows into the recent highs, it remains within a stone’s throw of major support lows created last December 19. In other words, if more concerted selling comes into the market, it wouldn’t take much to push CPFL to new long-term lows.

Given the fact CPFL has been so lackluster for the past 16 months and despite a strong rally off of the October 2011 lows, we continue to wonder at the commitment of options players on the longer term. If past is prologue, their lack of willingness to be net long this market may not be a harbinger of bullish sentiment.

Click charts to enlarge

Conclusion

The major indexes rallied last week, but we suspect strength could prove to be no more than a reflex rally spurred on by deeply “Oversold” short-term conditions. We do not think that any further buying that develops will prove to be sustainable on the larger Intermediate Cycle. If we are wrong, nothing but new highs above the March/April price highs (1422.38—S&P 500) would be good enough to re-assert longer-term trending.

If we are correct that the currently positive short-term tone is merely transitory, we also think that once selling resumes on the Intermediate Cycle, the June 4 short-term lows will be breached on the downside with the S&P 500 finishing its intermediate decline somewhere toward the lower end of the 1283-1213 price range.

*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.