Equity index price levels depend on cycle

Stock index, chart, technical analysis

Market Snapshot:

In the Sept. 1 edition of the New York Times there is an article titled, “Overpriced Real Estate? Well, Maybe It’s Art.” Reporter James B. Stewart explains how wealthy investors have recently been willing to pay upwards of $100 million for real estate properties in Manhattan, Miami, Los Angeles and a few other places. Some real estate professionals have begun to explain the stratospheric prices as yet another way for billionaires to collect “art.” One agent said, “When we call a property art, it tends to have architectural or historical significance.”

Others such as David Kusin, a former art curator at the Metropolitan Museum of Art, thinks such claims are nonsense. “There’s absolutely no statistical validity to it…. When people get crazy over something, they like to rationalize what they do.” Justification is the predominant theme Kusin asserts.

Market Overview – What We Know:

• Major indexes recovered somewhat last Friday, but prices were generally lower after creation of short-term high back on August 21 (1426.68—S&P 500).
• Recent low trading volume was amplified last week in front of upcoming Labor Day weekend. NYSE activity diminished nearly 4% on week and Average Price per Share fell 76 cents to $58.81.
• Short-term trend was last back in “prove it” mode and must rally above upper edge of 10-Day Price Channels (1416.10—S&P 500 through Tuesday) to suggest positive reversal.
• Intermediate Cycle remains positive and needs weakness below lower edge of 10-Week Price Channel (1331.11 through September 7) to turn negative.
• Short-term Momentum in S&P 500 was fractionally positive after toying with negative readings for most of last week. One of our two proprietary Minor Cycle Trading Oscillators is negative, the other on the verge of negativity. Intermediate Cycle remains positive toward “Overbought.”.
• MAAD was negative last week with 4 issues positive and 16 negative. MAAD Weekly Ratio was marginally “Overbought” at 1.12 with MAAD Daily Ratio “Oversold” at .87. Daily MAAD remains below its July 3 high despite higher S&P prices with similar action in Weekly MAAD that continues to hold below its April 2011 high, again despite higher S&P prices.
• Weekly CPFL was negative last week by 2.05 to 1 with indicator continuing to hold below April resistance highs.
• Cumulative Volume (CV) in both S&P 500 and S&P 500 Emini futures contract continues to hold below indicator highs made back in April, despite higher S&P 500 prices.

Which brings us back to the stock market, that unemotional and rational venue where justifications never surface. We draw your attention, once again, to the long-term (Weekly) chart of our Most Actives/Advance Decline Line (MAAD). Notice how the indicator peaked the week ending April 29, 2011 and has yet to seriously challenge that high over the past 16 months even though most of the major indexes, as measured by the S&P 500, made a higher high in April 2012 and then a slightly higher high the week ending August 24, 2012.

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

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

What we are suggesting is that EVEN THOUGH prices have gained over the past 16 months, the stock market has very likely entered the justification phase when many investors will slip into denial while believing any number of bromides and rationalizations that will underscore their belief that holding equities on the long-term will “work out.” In other words, if they are ignorant of such indicators as MAAD with negative divergences that have also been replicated in our Call/Put Dollar Value Flow Line (CPFL), and Cumulative Volume (CV), they will look to the upcoming national election to clarify their market stance – “Well, once that’s over….” Or, “the economy has been underperforming, but its momentum will kick in on the upside after the first of the year.” And so on.

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.

From our point of view, nothing but new highs in MAAD, CPFL, and CV would cause us to suggest our bearish grumblings have been in error. There’s also Momentum on all cycles that has failed to confirm any of the upside movement in the market since last October. That failure has been amplified by a distinct lack of market volume that has been uncharacteristically low for months to suggest higher prices have been spurred by weaker and weaker hands.

Or we could simply capitulate and say, “What the heck, so long as the market remains as a vehicle for buying and selling, it doesn’t matter where we buy Amazon, or anything else for that matter. Because in the long term it’s all ART.” Even if you have $100 million to buy a super high end cookie cutter apartment with mauve-colored drapes in Manhattan, or Miami. You betcha.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD continued to flutter within relatively narrow range last week while holding below July 3 high when S&P 500 hit an intraday high at 1374.81. MAAD has confirmed none of strength in S&P since then and into August 21 high at 1426.68. Mirroring short-term MAAD weakness, the larger Weekly MAAD Cycle has remained in a tentative mode since peaking back in April 2011. That series failed on two occasions to make new highs with the broad market in April 2012 and recently in August 2012.

The failure of MAAD in the historical context is an ongoing suggestion Smart Money has been using market strength to sell, on balance. The fact the broad market made slightly higher highs while MAAD did not on two cycles is, in our opinion, evidence that the underpinnings of this market are weak as compared to other periods when MAAD dramatically led on the upside (See MAAD articles in August and September issues of Futures Magazine).

McCurtain Call/Put Dollar Value Flow Line (CPFL)

After peaking back on August 17 on the daily cycle, CPFL has been drifting lower. While it’s true the indicator via the Daily CPFL Ratio has moved back into “Oversold” territory (last at .64), the larger Weekly CPFL Ratio remains toward “Overbought” territory (last at 2.13).

In addition, the failure of CPFL to better its April 2011 resistance highs, let alone the most recent levels, is another sign the internal mechanics of the stock market leave a lot to be desired, at least as measured by options activity. With options players continuing to show a lack of commitment on the upside and even though index prices have continued to work marginally higher, CPFL movement is an indication they could become more enthusiastic if equity prices begin to move lower.

Conclusion

The August 21 intraday and short-term high (1426.68—S&P 500) could prove to be the peak of the rally that began three months ago back on June 4 (1266.74—S&P 500). The proof of that assumption will be the ability of that August 21 high to hold in the sessions just ahead considering the fact the larger Intermediate Cycle remains positive and is still in an uptrend. Since we know for a fact the intermediate advance will be terminated at some point, the issue is now whether or not the August high was “the” high.

Adding to the mix is the fact that short-term “Overbought” conditions, especially in MAAD and CPFL, have given way to short-term “Oversold” levels. But overriding those realities is the additional fact that in the early stages of a larger cycle reversal, the trend toward near-term “Oversold” is not so much a buying opportunity as it is a suggestion the market dynamic is changing from positive to negative. The ability of that August high in the S&P to hold, or not, will determine the outcome in terms of whether or not near-term “Oversold” conditions are currently meaningful.

But underscoring all of this is the reality the broad market continues to exhibit weak volume, or lesser than “normal” activity, as our key indicators continue to dislike market price action. History suggests the best bet is on the indicators EVEN IF some investors continue to treat equity prices as “Art,” just as they are doing at the high end of the real estate market.

*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.