Volatility bailed out S&P, Dow, but stats remain questionable

Weekly Review: Can stock indexes continue making gains?

At the top of the list is MAAD which, on a Daily basis, has liked little of the market’s strength since peaking back on July 3 (see attached chart). This is one of the most noticeable divergences between the indicator and pricing we have seen in some time. What Daily MAAD is now suggesting, even though the S&P 500 was last toward 1390, is that the S&P ought to be closer to 1320. Or, in terms of raw percentages, while the S&P has recovered nearly 80% of its losses since the June lows (1266.74), Daily MAAD has only come back a little over 17%. That naked disparity between the S&P and MAAD is an overt suggestion that not only could Daily MAAD sink below its June 4 plot low with relative ease, but that Smart Money has been steadily backing away from this market.

Market Overview – What We Think:

  • While last Friday’s 217.32 point gain in Dow 30 and 25.99 point rally in S&P 500 were highly profitable for astute traders, as were the four days of losses that preceded those gains, fact is market was only slightly higher on week after all activity.
  • That movement in face of indicators that have continued to lag price action only makes us wonder how much real power move since June 4 lows (1266.74—S&P 500) has truly involved. Has strength been more fluff than stone or is it preliminary to follow through action that will ultimately lift major indexes to new highs for move begun in March 2009?
  • If it’s stone, then where’s indicator corroboration? Put another way, we cannot remember an instance where market powered higher indefinitely without confirmation from our key indicators. Is this another “new paradigm”? We doubt it.
  • Lingering negative divergence of Daily MAAD, that has confirmed none of market strength since peaking July 3, is ongoing suggestion Smart Money has been doing more selling into strength over past few weeks than buying. While S&P was last holding near 1385, Daily MAAD was positioned at equivalent S&P price of about 1320, an indicator level hit back on June 11.

So why the marked divergence between supposedly sophisticated buyers, as reflected by MAAD, and the broad market? The best answer is that the market rarely gives everyone what they want, especially at potential turning points when the “smart set” is willing to take on less market risk.

On the larger Weekly cycle, MAAD kept up with S&P pricing until late April 2011 following the March 2009 lows. Thereafter, as the May through October 2011 correction developed, MAAD continued to underperform to the extent that when the market began to do better into the fall of 2011, MAAD trailed and ultimately was unable to make a higher high into the spring of 2012. That was the first significant divergence that developed since March 2009 and was an indication Smart Money momentum was dissipating. While MAAD has looked anemic since the 2000 highs, it nonetheless rallied when the market advanced and declined when the market declined. Thing is, it has rallied less when the market went up and gave more ground on the downside when the market fell.

Daily S & P 500 with Cumulative Volume (CV)

cumulative, volume, s&p, daily

Weekly S & P 500 with Cumulative Volume (CV)

weekly, cumulative, volume, s&p

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