Stock market's bull run destined to end -- but when?

Market Overview – What We Think:

• Slightly higher high in Dow 30 last week on Intermediate Cycle notwithstanding, it remains to be seen whether or not market action over past few weeks will prove to be yet another corrective phase prior to new highs in Intermediate Cycle advance initiated after June lows, or something more negative.
• To resolve issue on positive side of ledger, S&P 500 must rally above September 14 intraday high (1474.51) to re-assert intermediate-term advance begun after June 4 low (1266.74).
• Without indicator confirmation, issue remains same as it has since late March/early April highs when MAAD and CPFL peaked. Intermediate Cycle Momentum peaked mid-February.
• On downside, S&P 500 must sell below rising uptrend line (last near 1420) with follow through weakness below lower edge of 10-Week Price Channel (1381.36 through 10-12). Weakness below latter point would almost certainly terminate four-month-old rally.
• Indicators such as Daily Most Actives Advance/Decline Line (MAAD) continue to suggest market has gotten ahead of itself. Daily MAAD has come nowhere near overcoming March 20 resistance high even though indicator participated, albeit feebly, on upside after June lows. 
• MAAD failure suggests Smart Money has only been buying a bit more than it has been selling over past few months, even though index pricing has made new highs for move initiated in March 2009.
• 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.

What this market reminds us a lot of is the famous California Gold Rush of 1848-49. During the first phase of that Wild West phenomenon, many of the 7,000 miners arriving early quickly made fortunes on the banks of the American River. Some became millionaires in a few days by simply picking up loose nuggets. One group of seven miners collected 270 pounds of gold in a month, a hoard worth about $8 million in 1848. In today’s dollars that gold would be worth about $160 million. Not bad for pick and shovel work. But then came 1849. By then the word of quick fortunes had spread, the 7,000 gold miners had swelled to over 50,000, as gold pickings had substantially diminished. Grabbing 270 pounds of gold in a month was, in 1849, mostly a pipe dream.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

So it is with all market trends including the stock market. While equities had a healthy bounce in the wake of the March 2009 lows, the bulk of the 3 ½ year bull market (106%) developed between March 2009 and May 2011. Since then, gains have been labored and the S&P 500 has only rallied 6.5% in 18 months. In addition, volume since 2011 is not now what it was off of the bottom in March 2009. While the S&P 500 has recovered nearly 87% of the decline sustained in the 2007/2008 bear market, Cumulative Volume has only come back about 50%. That tone is reflected in our Most Actives Advance/Decline Line (MAAD) that peaked at the end of April 2011 and has been in a modest downtrend ever since with a series of lower highs (see Weekly MAAD chart). While the Weekly MAAD series was last not far from its last resistance peak made mid-September, it still remains well below a long-term down trendline stretching back to 2000. Put another way, over the past 12 years and since the 2000 highs, MAAD has continued to suggest that Smart Money has not been participating in this market to the same extent it participated prior to that major high, a bullish MAAD tendency evident in the great bull market that began in 1974.

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

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

On the smaller cycle, Daily MAAD has been mirroring Weekly MAAD. Daily MAAD rallied nicely with the S&P 500 off of the October 4 lows and through late March 2012. But then the indicator deteriorated dramatically into early June 2012 when the market made yet another intermediate-term low. Since then, and despite the fact the S&P rallied to a new intermediate high in early September, Daily MAAD, while participating on the upside in rallies, has steadfastly refused to confirm S&P 500 strength. In fact, it had last recovered only 33% of its decline since the March 20 high. Once again, Smart Money has been signaling it has not liked the second rally on the short-term following that late March/early April 2012 high, just as it has not liked the second rally following the spring 2011 highs on the Intermediate Cycle.

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 fact both of those negative divergences are converging in the current time frame while our other key indicators like CPFL, Momentum, and Cumulative Volume (CV) have also failed to confirm on the upside makes us wonder if this market is well into a market cycle similar to that of the California Gold Rush when many of the “49ers” returned home poorer than when they left.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD was marginally higher last week, but the indicator is not poised to make a new Minor Cycle high even though the S&P 500 may be. More importantly, the daily indicator is nowhere near major resistance put in place back on March 20. That divergence is significant considering the fact the broad market, as measured by the S&P 500, was able to make marginal new highs in the move since June over the past month. In fact, Daily MAAD has only recovered 33% of its losses since March.

Weekly MAAD also makes us wonder how much more staying power this market may have. While index prices have been working gradually higher since the June lows, the fact remains that the S&P 500 has only gained 6.6% since May 2011. Weekly MAAD peaked the week ending April 29, 2011 and has yet to revisit that level. Clearly, one of two things will happen – either prices get in line with MAAD on both cycles, or MAAD must demonstrate renewed strength. Of the two possibilities, we suspect the latter will not occur.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL lost a little ground last week, despite modestly higher index pricing. The Daily CPFL Ratio moved toward “Neutral” (last at .94) and the Weekly CPFL Ratio remains toward “Overbought” (2.35).

While the indicator demonstrated some improvement on the smaller cycle from the end of June through the mid-September highs, that strength was lackluster at best and has left the indicator nowhere near overcoming major resistance put in place the week ending February 25, 2011, despite higher index prices in the wake of the spring 2011 highs. That negative divergence is an ongoing suggestion options players, from a Dollar Value point-of-view, have lacked the commitment evident in previous rallies.

Conclusion

A market without indicator confirmations eventually plays out like a team of explorers that loses its maps and supplies. The momentum of the expedition will carry the effort forward for a period of time, but eventually the absence of critical components will stall efforts. The stock market is no different. Without sustaining volume and broad participation, all rallies end. While the advance since March 2009 has carried on longer than we expected, unless key negative divergences between MAAD, CPFL, CV, and Momentum are eliminated in favor of pricing, we continue to suspect this stock market is surviving on borrowed time.

The fact the S&P rallied 106% from March 2009 through the spring of 2011 and only gained 6.6% from the high of May 2011 to date could be evidence that like the California Gold Rush of 1848-49, players late to the game could come up empty handed.

*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.