Will stock market bear accompany arrival of Fall Equinox?

Market Overview – What We Think:

• We cannot rule out possibility S&P 500 and will overcome resistance high (1422.38) put in place April 2. But we doubt October 2007 high (1576.09) will be surpassed.
• Strength above 2007 high in face of long-term indicator divergences that have persisted since 2000 highs flies in face of historical norms.
• Given remarkable failure of Daily MAAD since July 3, and despite market strength to new short-term highs since then, we continue to wonder if price strength since June 4 lows could prove to be end game prior to more serious decline. Lingering negative divergence by Daily MAAD is ongoing suggestion Smart Money has been doing more selling into strength over past several weeks than buying.
• If market fails short of March/April highs (1422.38--S&P 500), turns negative on Minor Cycle, and then threatens reversal of Intermediate Cycle positive, long-term uptrend stretching back to March 2009 lows would almost immediately become an issue since that trendline is now approximately coincident with June lows (1266.74—S&P 500).
• Ongoing failure of NASDAQ, Value Line index, and Russell 2000, to confirm recent gains in S&P 500 and Dow 30, is another indication breadth of market has been limited to bluer chips.
• If recent rally is legitimate and has more room to go on upside, then where’s indicator corroboration? We simply cannot remember an instance where market powered higher on long term indefinitely without confirmation from key indicators.

In a nutshell, it is the broad market that remains a giant question mark as we approach a potentially lethal and historically unsettling time of the year. That potential flux is underscored by indicators that have continued to throw out warning signs for months.

At the top of that indicator list is our Most Actives Advance/Decline Line (MAAD) that has performed poorly on the Daily Cycle since peaking back on July 3. While the S&P 500 was last holding toward 1405, Daily MAAD was plotted on an equivalent basis toward 1325 to suggest the S&P is probably overextended on the upside. While short-term MAAD kept up with the broad market nicely from the October 2011 lows until the March/April highs of this year, the decline in the market after April hurt Daily MAAD badly and the indicator has yet to recover.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

On the longer term, movement in Weekly MAAD has also remained weak (see the August issue of Futures magazine, print and Online, provides a monthly chart of MAAD). What is noticeable about long-term MAAD data is that after peaking several months before the broad market topped out in early 2000, MAAD has yet to better its late 1999 high. It failed into the 2007 market highs relative to both the 2000 MAAD peak and also to the 2007 price highs. It also failed to move above its 2011 highs into April 2012, despite price strength. All of those negative divergences are evidence that while Smart Money participated in the market on the upside since 2000 when required to, it did so with increasing reluctance. Since 2000 MAAD has simply traced out a series of lower highs and lower lows, an indication of long-term distribution.

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

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

Cumulative Volume (CV) is another market sore point (see accompanying Weekly charts). While CV moved with the market to a new long-term high into the fall of 2007, during the 2008 decline huge volume came into the market on the downside, and CV has never recovered from those volume losses. In fact, CV has only retraced about 50% of its decline since the 2007 highs to suggest, yet again, that the underpinnings of the uptrend since March 2009 have been fueled, progressively, by weaker hands.

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.

Another market barometer, the Call/Put Dollar Value Flow Line (CPFL), has shown some improvement over the past month on the short-term cycle, but on a longer-term basis that indicator also remains well below a major resistance high put in place the week ending February 25, 2011. CPFL was also last holding about 65% below its 2000 plot high.

In sum, as the stock market once again approaches a period of the year that has occasionally offered vulnerability, it’s important to keep in mind that the underpinnings of this market have continued to remain remarkably weak on an historical basis for far too long. It is our experience that sooner or later, when the door bell rings, the point will inevitably come when the Trick or Treater ringing will be a growling bear. Current market divergences do not leave us with a particularly sanguine feeling in that respect.

McCurtain Most Actives Advance/Decline Line (MAAD)

Index pricing pushed marginally higher last week, but neither Daily nor Weekly MAAD was on board. In fact, Daily MAAD, after failing to participate on the upside since its July 3 indicator high continues to suggest the S&P 500 should to be selling about 100 points lower. That negative variance with price action is a continuing suggestion Smart Money remains unimpressed with this market after having been unenthusiastic for some time.

Because it is the long-term trend that will ultimately determine investment grade decisions, we continue to think prudence will remain the watchword in the weeks ahead as the market enters an historically vulnerable time period.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL was net higher last week. But while the indicator is closer to resistance at the April 9 indicator resistance high than the December 19, 2011 support low, CPFL, like MAAD, confirmed little of the overall rally since the June lows let alone since the price lows of October 2011. That negative divergence is a continuing suggestion that options players, for whatever reasons they may be doing what they’ve been doing, have not been participating in market strength on a Dollar Value basis for over a year since Put options purchases have been neutralizing Call options buying. Such historical exceptions as this one are in keeping with the run up to a bearish resolution of market price action.

Conclusion

The dog days of August aside, the stock market is approaching a time of the year when major trends have been resolved. Given the fact that the Major Cycle rally that has been underway since March 2009 has been underscored with deteriorating indicator and volume performance for quite some time, we wonder if evolving circumstances could congeal in the weeks just ahead to produce a significant market turn for the worse.

While it would be easy to hang our analytical hat on just one indicator such as MAAD, the fact that all of our indicators are now demonstrating negative divergences in the face of Intermediate Cycle “Overbought” conditions makes us wonder if this market will be able to overcome the March/April highs, let alone the 2007 highs. An upside failure would not bode well for the bullish camp on the Major Cycle.

*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.