Stock market advances despite half-hearted indicator confirmation

Analyzing failure

Following its April 2009 high, Weekly MAAD sold lower during the ensuing Intermediate Cycle pullback to within range of the March 2009 lows by eclipsing nearly all of the gains accrued over the previous 14 months, and despite the fact the S&P 500 only pulled back 42% from its May 2011 high (1370.58) to the October 2011 low (1074.77). What MAAD was suggesting was that even though the indicator, a reflection of Smart Money buying and selling, had participated on the upside for the first two years of the move from March 2009 to April 2011, Smart Money was becoming more bearish on the market when the S&P pulled back than when it was rallying. That tone was highlighted when the S&P rallied to new highs in April 2012 and again last week when Weekly MAAD “failed to confirm” on the upside on both occasions.

Market Overview – What We Think:

  • Strength last week with gains by MAAD, CPFL, and CV to new short-term highs bolstered Intermediate Cycle, but fact all of our key indicators continue to hold well below early 2011 highs does nothing for positive flavor of long-term trend.
  • Fact that short-term Momentum has also confirmed none of strength over past several weeks, even last week’s gains, is a concern, given fact statistics have returned to “Overbought” conditions across cyclical spectrum.
  • Nonetheless, Intermediate Cycle remains viable and we must first see negative reversal of short-term trend to suggest possible weakening of larger cycle.
  • In background it’s important to keep in mind fact market is entering time of year that has proven to be historically vulnerable -- think 1929, 1987, and 2007.

The best way to look at this “confirmation” issue is to judge what the market has done with and without confirmation. From March 2009 through April 2011, the S&P 500 rallied nearly 106% with MAAD confirmation. Through last week’s S&P close the index had rallied nearly 120%. But since April 2011 when Weekly MAAD began to diverge from S&P 500 price action, the index only gained 6.9% over nearly16 months. So, is it better to have MAAD in synch with price action, or not? The answer is obvious.

Daily S & P 500 with Cumulative Volume (CV)

cumulative, volume, s&p, daily

Weekly S & P 500 with Cumulative Volume (CV)

cumulative, volume, s&p, weekly

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