Stock market advances despite half-hearted indicator confirmation

Stock index, chart, technical analysis

Market Snapshot:

Last week a reader emailed us asking about the “continuing failure” of our key indicators including MAAD, CPFL, and Cumulative Volume (CV) to underscore recent stock market price gains. The key word here is “failure.”

In the strictest sense, when an indicator “fails,” we presume the indicator is faulty. It doesn’t work well, is undependable and should be discarded. On the other hand, when an indicator “fails to confirm,” that is another matter. That latter description is the context within which we normally describe the actions of our indicators. These indicators are directional to the extent they move up when the market rallies and decline when the market falls. It is the EXTENT of the moves of the indicators that becomes the issue and which leads to “confirmation,” or not.

A case in point since the March 2009 lows is the movement of Weekly MAAD (see accompanying chart). The indicator made a low with the broad market and then rallied until the last week of April 2009. The S&P 500 peaked a week later. While the lead time by Weekly MAAD into that high was minimal, it is the action of the indicator since then that is important.

Market Overview – What We Know:

• Major indexes made strong gains last week with S&P 500 hitting best level since week of January 4, 2008 and Dow 30 since week of November 9, 2007. NASDAQ Composite rallied to new all time high. Value Line index failed to make a new all-time high by inches.
• All cycles including Short, Intermediate, and Major remain “Overbought.”
• While Daily MAAD, CPFL, and CV confirmed short-term strength that resulted in new Intermediate highs in major indexes last week, none of indicators has yet overcome major resistance to confirm price strength.
• To suggest Minor Cycle negative, S&P 500 must sell below lower edge of 10-Day Price Channel (1411.16 through Monday). Intermediate trend remains positive until lower edge of 10-Week Price Channel (1356.50 through September 21).
• NYSE trading volume rose 33.2% last week as compared to previous truncated holiday week. Average Price per Share gained $1.96 to $62.47 and overcame high at $61.48 made March 15.
• Weekly MAAD was positive with 17 issues higher and 3 negative. Weekly MAAD Ratio at 2.54 was toward “Overbought” levels. Daily MAAD rose above July 3 resistance high last Thursday, but remains well below March 20 high. Daily MAAD Ratio trending toward “Overbought” at 2.06.
• CPFL on both Daily and Weekly cycles rallied last week above first resistance made back on April 9. Daily and Weekly CPFL Ratios were toward “Overbought” levels (2.34 and 2.54, respectively).
• Cumulative Volume (CV) in both S&P 500 and S&P Emini rallied to new Intermediate highs last Thursday, but remain well below major resistance.

Our Call/Put Dollar Value Flow Line (CPFL) has behaved similarly to MAAD even though CPFL uses an entirely different data set via options statistics. CPFL peaked on the long term the week ending February 25, 2011 and just before the May 2011 highs. It has yet to revisit that level, despite higher S&P prices. CPFL did break above near-term resistance at the April 2012 highs last week, but it is the major cycle peak made 18 months ago that remains a major obstacle. While CPFL has participated on the upside when there were rallies since the spring of 2011, it has done so with less enthusiasm than during declines.

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 problem. Because CV reflects the bias of overall market activity, it is a good measure of the “quality” of rallies and declines. Following the 2009 lows, CV in both the S&P 500 and the S&P Emini kept in synch with the market until April 2010. Since then CV has confirmed NONE of the Intermediate Cycle highs in the S&P 500 even though it has participated in each rally. What has been happening, especially during the decline after the May 2011 highs, is that CV fell more than it gained. Some of that negative disparity has been erased recently with CV movement above the April 2012 resistance peak, but CV in neither the S&P nor the S&P Emini has broken above resistance made back in April 2010. A similar lack of upside confirmation has been evident in the Dow 30 and the NASDAQ Composite, even though the latter rallied to new all-time highs last week.

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.

The primary reason these negative divergences, the “failure” of our indicators to confirm price strength, is relevant is that these variances are the largest we have seen since the major highs that developed in early 2000 and then again in late 2007. In other words, the indicators, measurements of market health and the quality of the rally that began in March 2009, continue to suggest that even though pricing in the major indexes has continued to improve, the underpinnings of those gains has deteriorated.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD rallied above July 3 short-term resistance last week to underscore Minor Cycle gains in index pricing. But Daily MAAD, even with upside break, has retraced less than half of the indicator’s losses since it peaked back on March 20 even though the S&P 500 has rallied to new Intermediate Cycle highs. Weekly MAAD remains in similar straits after having failed to overcome resistance at April highs, let alone April 2011 high.

MAAD has a history of rallying with index pricing, as well as declining during periods of market weakness. What has been the issue for the past 16 months, and since the spring 2011 highs, is that the indicator has fallen more on Intermediate Cycle declines than it has advanced during Intermediate Cycle rallies. That ongoing negative divergence is what has accounted for the lack of confirmation on the upside. In other words, while the S&P 500 has experienced a series of higher highs since March 2009, after May 2011 MAAD has been demonstrating a series of lower highs. That negative disparity is evidence that Smart Money has become increasingly reluctant to buy into intermediate rallies while being willing to sell into intermediate declines.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Daily CPFL rallied above its April 9 resistance high last week, but in so doing has also moved rapidly back to “Overbought” territory (last at 2.34) on the smaller cycle. Moreover, while short-term resistance has been overcome, major resistance put in place the week ending February 25, 2011 remains substantially intact. In fact, CPFL has only recovered about 30% of the losses suffered since peaking 18 months ago. That disparity suggests that while options buyers have been participating by buying call options on a Dollar Value basis, that tone has been offset by almost as many purchases of Put options on a Dollar Value basis. As a consequence, the net bias of the indicator is an indication there is another important segment of the market that continues to view this market with skepticism.

Conclusion

Resumption of positive Intermediate Cycle last week with new all-time highs in NASDAQ Composite index and best levels in Dow Jones Industrials and S&P 500 since late 2007/early 2008 no doubt heartened bullish camp. But fact that while ALL of our key indicators were in step with the major indexes from March 2009 until May 2011, a gain that saw S&P 500 rise nearly 106%, since early 2011 NONE has made new highs from the move while the S&P has only gained 6.9% since May 2011.

The marked variance between our indicators and index pricing for the better part of the past two years could be an indication that as the major indexes attempt to continue higher, the oxygen levels as exemplified by the market’s underpinnings could become thinner and thinner.

*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.