Stock market, like summer, is heating up on all cycles

Bull, Bear, Market prices

Market Snapshot:

The long, hot struggle continued last week. And by that we do not mean the heat wave that has affected a large part of the United States recently, and especially the East Coast where we are ensconced almost on top of our trusty, rattling air conditioner. No, we are referring to the conflict in the stock market that has been playing out for months.

On one hand we have index pricing that has been moving net higher since the March 2009 price lows (666.79—S&P 500) through the recent March/April highs (1422.38—S&P 500). Those who bought the index at the precise bottom and held until April 2 when the S&P 500 reached its peak gained 113% in just over three years. Via last Friday’s close that gain was holding at 103%. Which leads to the big question: “How much of that profit will be kept in the weeks and months ahead?”

And on the other hand….

From the June 4 low to the April 2 high the S&P 500 advanced 108.07 points for a gain of 8.5%, at least until last Friday when that gain was whittled back to 6.9%. Friday’s 12.90 point loss in the S&P 500 to 1354.60 (124.19 points in the Dow 30 to 12772.47) in that June 4/April context is noteworthy for a number of reasons. First, the Minor Cycle advance from June 4 unfolded in two parts that could prove to be an a-b-c rally with an upside target toward 1405—S&P 500. Second, there’s a problem with that measured move target, however, to the extent short-term Momentum has so far failed to “confirm” the “c” leg of the rally, which means the short-term advance may be running out of steam. Third, the market remains “Overbought” in terms of our short-term Trading Oscillators that have yet to give any ground on the statistical downside, which remains the market remains vulnerable on the near term cycle. And last, Daily MAAD broke below a short-term uptrend on Friday. The indicator had been improving since the June 4 low after retracing only about one third of its loss since the April high, whereas the S&P rallied back about one half.

Market Overview – What We Know:

• Major indexes closed mixed last week with S&P 500 and Dow Industrials negative with small gains showing in NASDAQ Composite and Value Line index.
• Short-term trend remains positive, as measured by S&P 500, but margin for error on downside is diminishing. Selling below lower edge of 10-Day Price Channel (1321.91—S&P 500 through Monday) would suggest end of uptrend begun after June 4 lows (1266.67—S&P 500).
• Larger Intermediate Cycle trend remains negative, despite recent upside thrusts by index pricing. Sustained buying above upper edge of 10-Week Price Channel (1358.88—S&P 500 through July 13) would be required to reverse intermediate trend to positive.
• NYSE volume declined last week by nearly 40% in response to July 4 holiday week. Average Price per Share rose 16 cents to $58.32 as compared to previous Friday.
• Daily MAAD was negative Friday by 1 to 19 and broke downward through trend line stretching back to June 4 indicator low. Daily MAAD Ratio was stuck toward “Neutral” at 1.03. Weekly MAAD was negative with 9 issues positive and 11 negative. Weekly MAAD Ratio was toward “oversold” at .76. Readings in “Overbought/Oversold” spectrum can persist for extended periods of time although shorter-term statistics tend to be somewhat more sensitive.
• Daily CPFL was negative Friday by 1.31 to 1.
• Cumulative Volume (CV) in S&P 500 and S&P 500 Emini futures contract have moved in step with index pricing, but remains weaker than S&P 500 on relative basis.

So what does this short-term information suggest? It could be an indication the rally over the past month will prove to be merely a reflex bounce in the face of a lingering and still negative Intermediate Cycle.

Second, there is another issue with long-term MAAD. On the Major Cycle, MAAD made its all-time high in May 1999 when the S&P 500 was quoted at 1330. While the S&P rallied another 16% into the March 2000 high at 1552.87 before a 50% drop into October 2002 (772.82), since then MAAD has come nowhere near recovering to that 1999 high. In fact, while the S&P was last holding about 75% into its advance from the March 2009 low as compared to the April 2012 high, MAAD was sitting at the 15% level. Put another way, if MAAD sinks more than 15% it will make a new Major Cycle low.

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

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

What is relevant and remarkable about the condition of MAAD on the longer term is that the current status of the indicator is the reverse of the accumulation phase that preceded the bear market lows in the mid-1970s. That period was preceded by nearly a decade of accumulation, as measured by MAAD, that was followed by the greatest bull market in history. The present relationship of MAAD to index pricing is the opposite of what it was four decades ago.

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.

We’ve also talked of late about the ongoing deterioration of our Call/Put Dollar Value Flow Line (CPFL), the poor performance of Cumulative Volume (CV), both using entirely different sets of data, and the proximity of Major Cycle Momentum to negative territory. The point is, the rally from March 2009 until the recent highs has had even weaker statistical underpinnings than the bull move from October 2002 until October 2007. How the current short-term move plays out within the context of the current, and still negative intermediate move, will ultimately play out on the Major Cycle, and will determine the accuracy of our key indicators in the weeks and months just ahead.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD had a schizophrenic week last week. After rallying to a new short-term high last Tuesday, MAAD gave back most of the gains last Thursday and Friday while also sinking below a defined uptrend line stretching back to the June 4 indicator low. The MAAD Daily Ratio continues to hover near “Neutral” at variance with our short-term Trading Oscillators, but a neutral reading in the current near-term context is simply noncommittal.

Of more importance is activity with Weekly MAAD which, as we suggest in our Market Summary, has continued to underperform index price action for months, if not over the past decade-plus and since the March 2000 highs. While the indicator has mirrored market strength to the extent it has moved up when the market rallied and declined when the market was weak, on an overall basis Weekly MAAD has demonstrated a series of lower highs and lower lows, especially since the 2007 market highs, to indicate diminishing enthusiasm for the market by Smart Money.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL continues in its summer vacation mode. The indicator remains locked between last December’s lows and the indicator’s April highs. It confirmed virtually none of the advance since last October and remains well below its February 2011 highs.

The failure of CPFL to advance, despite price strength in the major indexes, is yet another concern we have for the longer term viability of this market. With options players so clearly reluctant, on an adjusted Dollar Value basis for Calls and for Puts, to commit to the long side of this market, there is a markedly negative undertone in evidence. There is historical precedent via negative CPFL readings on the longer term and the outcome favored the indicator.

Click charts to enlarge

Conclusion

Although last week’s trading was abnormal to the extent it occurred during a holiday week and was off by nearly 40%, we wonder if price action could prove to be a watershed event nonetheless. No doubt inconsistencies will be rectified in the coming week as trading returns toward normal. But the fact that pricing in all of the major indexes we follow failed at the upper edges of 10-Week Price Channels, a suggestion the short-term rally begun after the June 4 lows could be in an endgame. Friday’s selling amplified that notion as did Friday’s weakness in MAAD that sank below an uptrend line stretching back to early June.

It is a certainty, however, that the evolution of the short-term trend will determine the outcome of the Intermediate Cycle that will determine the staying power of the Major Cycle trend. Considering the status of most of our longer-term indicators, a near-term stumble could easily develop into a long-term fall.

*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.