S&P 500 at intermediate high, but big picture uptrend tepid

Market Overview – What We Think:

• While last week’s gains pushed S&P 500 and NASDAQ Composite index above March/April highs, failure of Dow 30, Value Line index, and all of our key indicators to confirm strength leaves pall over market that has persisted since spring of 2011.
• In fact, with S&P 500 only having gained 4.9% since May 2011 high (1370.58) through last Friday, we continue to wonder if market risk in face of indicator deterioration is worth the longer-term exposure.
• From purely long-term perspective, nothing but strength above October 2007 S&P 500 high (1576.09) would give this market a bullish imprimatur equal to that the market experienced from 1994 through mid-1999 when prices and indicators were fully in synch.
• Fact is, since 2000, longer-term rallies by market have become increasingly labored relative to indicator performance.
• As a consequence, without strong follow through on upside by indexes and our indicators that remain weak, we must regard last week’s gains with suspicion, especially considering fact market is entering time of year that has proven to be historically vulnerable -- think 1929, 1987, and 2007.
• Ongoing negative divergence by MAAD on both Daily and Weekly cycles reflects fact Smart Money has been looking askance at equities on both trends, despite recent gains. Current negative MAAD divergence is largest we have seen since October 2007.

But here’s the problem. Since its high May 2, 2011, the S&P has only gained 4.9% over the past 16 months. Coincident with those price highs in May 2011, ALL of our key indicators peaked and NONE have surpassed their 2011 highs since then. Our Most Actives Advance/Decline Line (MAAD), Call/Put Dollar Value Flow Line (CPFL), Cumulative Volume (CV), and Momentum on all cycles have all failed over the past 1 ½ years to make new highs with index pricing.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

In the face those statistical divergences any observer is justified in saying, “So what? Prices have moved higher.” No denying that assertion, but from our point-of-view, when the market enters a period when gains become more labored and there is no confirmation from indicators that have solid historic records, then what’s an investor to do?

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

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

When disparities between index pricing and indicators persist over a period of time, not only must an investor become much more aware of pricing weakness when it develops, he must become increasingly reluctant to remain as fully engaged as during previous periods when index pricing and the indicators were fully in synch. When the market reached deeply oversold levels in March 2009 on all cycles (Daily, Weekly, and Monthly) and prices began moving sharply higher, all of our key indicators kept in step with pricing. In other words, from the March 2009 low in the S&P 500 (666.79) until the peak in May 2011 (1370.58), the S&P 500 gained nearly 116%. Since then it has added another 10% relative to that 2009 low or the 4.9% we calculated from the 2011 high. Simply put, is it worth it to remain fully invested when a wide array of indicators is suggesting market underpinnings have grown progressively weaker?

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.

Will this market continue higher in the sessions and weeks ahead? Maybe. But keep in mind that we are rapidly approaching that period of the year, the fall, when some big time bear traps have been laid for the unwary and complacent. Keep in mind 1929, 1987, and 2007. The S&P 500 remains nearly 9% below its October 2007 high (1576.09), a critical resistance point for this market and a lid all of our indicators reached 1 ½ years ago. And since then? The S&P has rallied in only the single digits.

McCurtain Most Actives Advance/Decline Line (MAAD)

The S&P 500 rallied to its best level (1437.92) since the week ending May 23, 2008 last week. But that strength was not confirmed by Weekly MAAD that has consistently failed to make new highs with the S&P since late April 2011 with failures into the April 2012 price highs and again last week.

That ongoing negative divergence is a suggestion that while Smart Money has participated on the upside when the market has rallied it is not done so to the same extent it bought during other previous rallies. Moreover, when there have been periods of net selling, such as from May through early October 2011, Smart money has been more eager to sell.

Considering the additional fact that Weekly MAAD was in synch with the S&P from the March 2009 lows until the Spring 2011 highs for an S&P gain of nearly 116%, and given the additional fact the S&P has only gained 4.9% since those 2011 highs, we continue to wonder if a net long exposure is worth the risk.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL on both the Daily and Weekly cycles was positive last week. Coming off of deeply “Oversold” conditions that were coincident with the end of the two week consolidation in the broad market, the CPFL Daily Ratio was last moving higher toward moderately “Overbought” levels with the Weekly CPFL Ratio toward “Overbought.”

Since CPFL has yet to overcome first resistance at the April 9 resistance highs, despite strength in the S&P 500 to new intermediate highs last week, options players still appear reluctant to do enough buying to underscore index price gains. That hesitation presages not a bullish resolution for the market, but the contrary, considering the historical performance of CPFL.

Conclusion

The S&P 500 rallied to its best level last week in more than four years, the NASDAQ Composite since late 2000. But not the Dow 30, the Value Line index, MAAD, CPFL, CV, or Momentum on any cycle.

So what’s going on?

In our main commentary we point out that from March 2009 until May 2011 the S&P 500 rallied nearly 116%. With that strength came confirmation from all of our key indicators. Then negative divergences began to develop. And even though the S&P has staged a strong rally since the October 2011 lows, on a net basis and relative to that peak in the index in May 2011 (1370.58), the S&P has only rallied 4.9% in 16 months as our key indicators have failed on two occasions to confirm market strength.

When such divergences in the face of market strength persist, there is only one conclusion that can be derived – the market is drawing closer and closer to a significant long-term top and the divergences are simply an indication that the underpinnings of the market are weakening and that strength is being spurred by weaker and weaker hands.

*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.