Stock market near highs without key indicator confirmation

Bull shadow, stock market, chart

Market Snapshot:

With last Friday’s close in the S&P 500, 12 weeks have elapsed since the major indexes put in place short to intermediate-term lows back on June 4. And while the S&P 500 and the S&P Emini futures contract rallied marginally above their late March and early April highs last week before fading, that action was a solo performance since none of the other major indexes with the exception of the tech-weighted S&P 100 confirmed S&P 500 strength by also reaching their best levels since March 2009.

More importantly, it could be important to put price action since June into perspective relative to movement over the past year, since March 2009, and since October 2007. If an investor had purchased the S&P at the June low he would now be up a little over 12%. If he bought in May 2011 and has been waiting for the past year to break even, he’d now be up about 4%. If he was super prescient and bought back in March 2009, he’d be ahead 113%. But alas, if that same investor bought in October 2007 he’d still be in the hole by more than 9%.

Our point?

Market Overview – What We Know:

• Major indexes lost ground last week.
• NYSE trading volume rose about 3% on week, but was still below normal. Average Price per Share declined 25 cents to $59.57. Highest recent AP/S was $61.48 on March 15.
• Dow Jones Industrials price action last Tuesday suggested Key Reversal Day, but none of other indexes confirmed that action in Dow 30.
• S&P 500 and Dow Jones Industrial Average slightly penetrated lower edges of 10-Day price Channels and now must move above upper edges (1412.55—S&P 500 and 13240.29—Dow 30 through Monday)  to suggest resumption of uptrend. NASDAQ Composite and Value Line index have yet to fracture lower edges of 10-Day Price Channels.
• Intermediate Cycle would require weakness below lower edge of 10-Week Price Channel (1323.49 through August 31) to turn negative.
• Short-term Momentum in S&P 500 was last near “Neutral” while our proprietary Trading Oscillators on Minor Cycle remain positive, but were last moving lower from “Overbought” levels. Intermediate Cycle remains toward “Overbought.”.
• MAAD was negative last week by 5 to 14 (1 issue unchanged). Weekly MAAD Ratio was moderately “Overbought” at 1.29. Daily MAAD continues to hold below peak made July 3.
• CPFL was negative last week by 1.48 to 1 and continues to hold below resistance put in place back on April 9. Daily and Weekly CPFL Ratios remain toward moderately “Overbought” levels.
• Cumulative Volume (CV) failed to confirm strength in S&P 500 and S&P Emini to best levels since June 4 last week.

WHERE and WHEN purchases were made remains the issue as it always does. And for investors looking at the market now, the dilemma is are older longs going to warrant retention as time goes on and does the market’s current status justify the addition of new positions in expectation of more price appreciation? While the time horizon for holding a position is an issue, short-term trade vs. long-term, what the stock market is going to do even on the near term will affect both the short and long-term holder.

Market Overview – What We Think:

• Tuesday’s price reversal may have signaled an end to rally in effect since June 4 lows. While Key Reversal Day was signaled in only Dow Jones Industrial Average, all major indexes were negative on week.
• Ongoing negative divergence by Daily MAAD in face of market strength since MAAD peaked July 3 reflects fact Smart Money has been exiting, if not simply avoiding, market. With disparities in place, odds will continue to suggest short to intermediate-term highs could be imminent, if they have not already been reached via last week’s highs.
• If market 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 trendline is now approximately coincident with those June lows (1266.74—S&P 500). In other words, if June lows are fractured on renewed selling, odds would be good major advance since March 2009 could be finished.
• If recent rally is legitimate and has more room to go on upside, we continue to wonder about indicator corroboration? We cannot remember instance where market powered higher on long term indefinitely without confirmation from key indicators. Tuesday’s reversal may have finally resolved that problem.

A few weeks ago we summarized the status of one of our key indicators, the Most Actives Advance/Decline Line (MAAD). In fact, in the August and September issues of Futures, we provide an in depth analysis of MAAD on the Monthly Cycle stretching back to 1961 with a trading algorithm comparing MAAD to the more traditional, and in our opinion highly flawed NYSE A-D Line.

Following a super cycle bull trend in the stock market that began in the late 1970s, equity prices made a significant top in 2000 that has yet to be surpassed statistically over a wide range of indicators, and specifically MAAD. Although the indicator moved with equity prices off of the 2002 and 2009 lows, it has never regained the tactical luster it experienced prior to 2000. A series of lower highs and lower lows have predominated, action that suggests that the Smart Money crowd, that group which MAAD reflects, has not been buying equities to the same extent they bought prior to that 2000 high.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

Even in such a market environment, however, there can be powerful rallies and money can be made. The uptrend since March 2009 is an instance of such a move. But statistically, the “quality” of the rally over the past 3 ½ years is inferior. Not only has there been a marked deterioration in overall market activity as reflected in actual market volume and then sentiment indicators like MAAD, but there has been a prevailing unease that is not characteristic of a powerful and dynamic bull trend. Imagine a sustained bear market reflex rally vs. the market uptrend that lasted from late 1994 until early 2000.

While we fully realize that continuing to call for a final market high while using divergence tools that continue to weaken, even as prices continue higher, is a form of calling “wolf,” to deny the status of these indicators would be a lot like denying the validity of storm clouds on the horizon as the temperature is dropping precipitously in coincidence with falling barometric readings.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD Daily high put in place July 3 remains intact. Peak was made about one-half way through S&P 500 price advance begun June 4. Fact that Daily MAAD made more important top back on March 20, and has been moving net lower with only a slight reflex bounce following June 4 low, is significant and could be an indication Smart Money has continued to avoid this market despite apparent recent strength.

The last time we witnessed such MAAD deterioration prior to a market high was in the period just before the May 2011 highs and prior to that into the October 2007 highs when MAAD peaked in early July 2007. Underscoring short-term MAAD deterioration is the failure of Weekly MAAD relative to the April 2012 high and the May 2011 high.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL was net lower last week and continues holding below a resistance high made back on April 9. While the indicator has been demonstrating some strength since early July in the wake of the early June lows, CPFL is still weak on the long term cycle and is nowhere near significant highs made in February 2011 prior to the May 2001 highs.

The fact that CPFL, like MAAD, has confirmed little of the price moves since the broad market made lows in October 2011 is a classic long-term divergence that could be preliminary to the creation of a significant Major Cycle high on the order of the one created in October 2007.

Conclusion

Net losses prevailed in the stock market last week, but the short and intermediate-term trends have yet to be decided. True that the Dow Jones Industrial Average signaled a Key Reversal day via negative price action last Tuesday, but that movement was indecisive since none of the other major indexes confirmed it.

What remains as a significant issue in this market environment is the status of our key market indicators relative to price action. MAAD, CPFL, Momentum, and Cumulative Volume (CV) continue to lag index pricing, as they have continued to do for weeks and, on the larger cycles, for months.

In the face of these negative indicator divergences relative to price action that has been seemingly reluctant to give meaningful ground on the downside is to say that we have never seen an instance where our indicators continued to deteriorate and the market did not follow suit. The question now is when the synchronicity will occur.

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.