Stock market moves sideways, but remains overbought

At any rate, when the crisis hit the firm, the bear market in the Mortgage-backed securities world was already underway. The firm waited too long, did not act when its safety triggers were hit, and probably went broke, even though that latter scenario is not made fully clear in the film.

So what does all this have to do with the stock market NOW? Fact is, the bull trend that has been underway for the past 3 ½-plus years is getting long in the tooth by any historical, cyclical standards. What is evident is that the character of the stock market changed after 2000. Not only was there a dramatic, albeit mostly tech sector limited, drawdown from 2000 to 2002, but since then not only has trading volume diminished, but none of our key indicators has demonstrated the upside “oomph” that characterized market activity prior to 2000. We’ve written often of the breakdown in the Most Actives Advance/Decline Line (MAAD) since 2000, and most noticeably since the spring of 2011 when three successive higher highs (May 2011, April 2012, and recently) in the S&P 500 were not confirmed by MAAD. That negative divergence may prove to be of historical importance.

The Call/Put Dollar Value Flow Line (CPFL), Cumulative Volume (CV), and Momentum on all cycles (Short, Intermediate, and Major), except for minor variances and despite the fact all are computed on different strings of data, have also failed to confirm S&P pricing since the spring of 2011. Although it’s true the S&P has gained 6.5% since the May 2011 high at 1370.58 that return on investment, given currently “Overbought” levels on all cycles, Minor, Intermediate, AND Major, makes us wonder if exposure to the longer-term vicissitudes of the market are currently worth the risk.

While we realize the unfolding of indicator health is a “work in progress” and will be subject to future market action and the inputs upon which the indicators are constructed, if past is prologue, and we do believe it is, then this market has entered into a period of longer-term risk similar to that period upon which the move, “Margin Call,” was based. If we are correct, or more precisely if our indicators are correct, those indicators will once again have proven their worth. The other choice is to follow the path of those “professionals” in the movie who generally accepted the notion that the party would end at some point, but “down the road,” and did nothing until it was too late. In other words, given the status of this market relative to our key indicators, we would prefer to be a bit early leaving the party than too late, because the latter choice would almost certainly involve a “fire sale” hangover from which it would be difficult to recover.

Market Overview – What We Know:

• Major indexes closed within fractions of even last week and made little progress, one way or another, over past six trading sessions. Only NASDAQ Composite made slightly higher high last week relative to recent short-term highs hit September 14.
• All cycles including Short, Intermediate, and Major remain positive, but “Overbought.”
• NYSE trading volume rose nearly 22% last week, but Average Price per Share declined 44 cents to $62.03.
• To suggest Minor Cycle negative, S&P 500 must sell below lower edge of 10-Day Price Channel (1437.92 through Monday). Intermediate trend remains positive until lower edge of 10-Week Price Channel (1366.48 through September 28).
• Weekly MAAD was negative with 4 issues positive and 16 negative. Weekly MAAD Ratio at 1.42 was toward moderately “Overbought” levels. Daily MAAD rose above July 3 resistance high on September 13, but remains well below March 20 high. Daily MAAD Ratio was last at 1.28.
• CPFL on both Daily and Weekly cycles rallied last week to new short to intermediate highs and remains above first resistance made back on April 9. Daily and Weekly CPFL Ratios were toward “Overbought” levels (2.60 and 3.12, respectively).
• Cumulative Volume (CV) in both S&P 500 and S&P Emini rallied to new Intermediate highs September 13, but remain well below major resistance.

Market Overview – What We Think:

• Another string of days in which major indexes moved laterally brings to mind question: “Is market simply hesitating prior to another upward thrust on Minor Cycle?”
• Given “Overbought” conditions on all cycles, we would need to see proof positive in S&P 500 above September 14 intraday at 1474.51 to suggest resumption of Intermediate Cycle advance.
• Big difference between current pricing and recent run-up following upside break on September 8 is that market is not “Oversold” now as it was then. In other words, further gains could only increase the upside risk while selling and net weakness would decrease it.
• Fact none of our key indicators is anywhere near making new cumulative highs, even though CPFL has demonstrated some renewed life over the past few weeks, is additional evidence that character of this market has changed since May 2011.
• Nonetheless, all cycles remain positive, and until we see first negativity with downside break and reversal of Minor Cycle to negative, we must defer to currently positive, albeit overheated, bullish trend.
• 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.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

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

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

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.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD demonstrated little change last week and remained in relatively narrow range initiated via short-term high September 14. While that peak bettered July 3 short-term high after interim pullback to early August low, indicator is nowhere near overcoming major resistance put in place back on March 20. In fact, Daily MAAD has only retraced about 50% of losses incurred since March even though S&P 500 has rallied another 3.6% into the September 13 peak (1474.51) following that March high.

On the Weekly MAAD cycle, the indicator fell modestly last week after hitting for the third time a declining trendline stretching back to the late April 2011 indicator high. That negative divergence is also in stark contrast to higher S&P 500 prices since the spring of 2011 that have resulted in a gain in the S&P of 6.5%.

The ongoing divergences between MAAD on the Minor and Intermediate Cycles is a lingering suggestion that the underpinnings of this market since at least May 2011 have taken on a decidedly different character from the strength that characterized market gains following the March 2009 lows when the S&P rallied nearly 106% before negative MAAD divergences began.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL rallied to new short and intermediate-term highs last week and remains above first resistance highs put in place the week of April 9, 2012. Neither series is anywhere near overcoming major resistance made the last week of February 2011 and just prior to price weakness that developed in May 2011, let alone to resistance highs made prior to the October 2007 price highs.

What the indicator is currently saying is that options players, on a Dollar Value basis, have been willing to ante up for more calls than puts lately, but that on a longer-term basis there is still not enough firepower to suggest the psychological underpinnings of the options portion of the market are signaling anything more than an interim bounce.

Conclusion

Since the early June price lows there have been six short-term rallies and five short-term pullbacks. Each of the pullbacks resulted in statistical readings toward “Neutral” in short-term Momentum and our proprietary Trading Oscillators. The Daily MAAD Ratio dipped toward “Neutral” and a bit lower on three of those occasions while CPFL was deeply “Oversold” into only the most recent early September price lows. NONE are currently “Oversold” and only the Daily MAAD Ratio is toward “Neutral” at 1.28. Our point? If index pricing is going to rally from current levels it will do so in the face of a majority of short-term indicators that are “Overbought.”

We cannot deny the fact that all cycles, including a Minor Cycle that is mostly “Overbought,” remain positive. But given our discussion of the movie, “Margin Call,” earlier in this summary, when is the best time to sell? Into a rising market and before the trend changes, or into a falling market when prices are on the verge of becoming “toxic”? The answer, of course, depends on the status of the market and how much life it still has in it. From our point of view this market, however, we would not let the triage team take a vacation just yet.

*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.