Equities near decision point on three-year bull move

First, our Daily Most Actives Advance/Decline Line (MAAD) does not look as bullish as S&P 500 pricing. Although it’s true the indicator bottomed on June 4 when the S&P hit its nadir and has rallied along with S&P prices since then, whereas the S&Ps low on June 4 was at 1266.77, MAAD was plotted at an S&P equivalent level of about 1210. Currently, while the S&P is trading at 1362 and change, MAAD has only recovered to about 1270. That divergence between the S&P and MAAD is an indication that while Smart Money bought into the June 4 lows, it has not been as enthusiastic as S&P pricing since then. There is also the fact that our MAAD Daily Ratio, last near 1.07 in “Neutral” territory, could reach “Overbought” regions again with relative ease. In other words, it’s starting from a higher level than was the case back on June 4. Adding to the mix, our Weekly MAAD stats currently show moderately “Oversold” conditions that could “allow” for some additional short-term strength. But will Weekly MAAD Ratio moderately “Oversold” levels be enough to suggest the market is poised to not only continue the short-term rally, but to also turn the still negative Intermediate Cycle positive with follow through strength to new highs?

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

Given the fact that Weekly MAAD failed to better its 2011 highs when the S&P 500 rallied to new in April, there is a lingering hint the long-term status of this market has become increasingly uncertain. The sharp decline from August through November 2008, within the context of the 2008-2009 bear market, the decline from April through June in 2010, and the sharp selloff from May through early October 2011 were evidence of the weakness of MAAD. During those periods the indicator not only moved sharply to the downside on weakness, but also failed to improve dramatically on the return moves. That action suggests a lack of commitment.

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

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

 Some will say, “So what, the market has done well since March 2009 and has in fact recovered the lion’s share of that 2008-2009 decline? Besides, we buy price, not MAAD.” They are correct. But what we are suggesting is that when MAAD is viewed within the context of the very long-term trend, the movement of the indicator since the 2000 market highs has been unfolding a remarkable negative divergence. Imagine lines of supply in a military campaign and equate that force with market volume and you will have an approximation of what has been occurring with MAAD. In other words, an army cannot win battles if the lines of supply are weak or absent.

                              7/2              7/3               7/4             7/5               7/6              7/6              7/31

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, we cannot rule out the possibility this market could engage in yet another up leg in the advance that began in March 2009. The short-term trend has flipped back to positive and the next larger Intermediate Cycle negative is in jeopardy. To clinch the deal, all that is required is strength back above the S&P 500 April 2 high at 1422.38. But as the German army discovered atStalingrad, chutzpah will not overcome stark realities and mediocre lines of supply.

McCurtain Most Actives Advance/Decline Line (MAAD)

Despite sharp gains in major indexes last Friday, Daily MAAD did not better June 20 resistance level. While the amount of distance Daily MAAD must travel to better that level is thin and could be erased with only 11 plus issues, the fact there is a negative divergence in front of a light volume holiday week could mean last week’s gains were more window dressing than substance.  In addition, given the fact the Daily MAAD Ratio is already at 1.07 at “Neutral-plus” at the start of a possible short-term rally means it would take much less price strength to move the MAAD Daily Ratio back into “Overbought” territory. The last two times the ratio was “Overbought” were on March 20 and June 19 at levels that generally coincided with short-term highs. The MAAD Weekly Ratio was last “Oversold” at .81. The last time the Weekly Ratio was that “Oversold” was at last November’s lows. In either case, however, Daily “Overbought” or Weekly “Oversold,” those conditions can persist and do not mean, necessarily, that a change in trend is written in stone.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL remains range bound and locked about mid range between lows reached last December 19 and a high made April 9. At the same time, the indicator is nowhere near breaking above a significant resistance peak created the week ending February 25, 2011. The lack of commitment by options players over the past 16 months, net, to either the buy side or the sell side of the market as reflected in Call Dollar or Put Dollar purchases has resulted in a statistical stalemate. What is more significant, however, is the fact CPFL failed, like Weekly MAAD, to confirm strength in the S&P 500 and the other major indexes to new highs relative to the May 2011 price highs. It is nonetheless true, however, that the Weekly CPFL Ratio like its Weekly MAAD Ratio cousin is currently in “Oversold” territory with a reading last Friday at .72. That low reading is a suggestion CPFL on the Intermediate Cycle could be susceptible to a more bullish tone in the weeks just ahead, despite the overall appearance of a lack of enthusiasm in the cumulative CPFL indicator.

Conclusion While history will no doubt have something to say about the events of last week including the Obamacare ruling by the U.S. Supreme Court and decisions made by European powers relative to the euro and bank debt, the market may simply have been susceptible to some upside activity given near-term “neutral” readings and Intermediate Cycle “Oversold” conditions. What now remains to be seen is how strong the short-term “up” begun last Friday will ultimately be, what effect gains could have relative to the lingering Intermediate Cycle negative (10-Week Price Channel high at 1368.93—S&P 500 through July 6), and then how pricing relates to the late March/early April highs (1422.38—S&P 500). Decisions in those three areas will decide the outcome of the long-term advance begun in March 2009.

MAAD Daily data for past 30 days*                                  CPFL data for past 30 Days

*Note: Unchanged issues are not counted.

MAAD Weekly data for past 30 Weeks*                          CPFL data for past 30 Weeks

*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.