Stock market searches for near-term low

Market Overview – What We Think:

• Renewed selling last week in major indexes underscores our belief mid-September prices highs (1454.71—S&P 500) should prove to be peak of Intermediate Cycle advance begun after June lows (1266.74—S&P 500).
• While short-term “Oversold” conditions have been surfacing as result of recent market negativity, it’s important to remember “Oversold” in early stages of new decline may be merely reflection of new “negativity” and unfavorable market momentum and not of a buying opportunity.
• When short-term bounce does develop, what will likely be lacking, however, as has been case since spring 2011 highs, would be indicator confirmation on upside, lack of which we continue to suspect has been revealing a lot about internal strength of market on long term cycle.
• Indicators such as MAAD continue to suggest Smart Money has only been buying somewhat more than it has been selling for weeks, if not months, even though index pricing has made new highs for move initiated in March 2009. Smart Money tone is not bullish.

There is also a larger issue that could play out in the weeks just ahead. If it turns out there is more selling to come on the Intermediate Cycle, “Oversold” conditions would develop. Then the status of the Major Cycle would determine whether or not Intermediate Cycle “Oversold” condition is truly “Oversold” or merely the tip of a long-term reversal to negative, a change that would reverse the uptrend in effect since March 2009.

Since the early 2009 lows there have been three Intermediate Cycle lows with three coincident intermediate “Oversold” conditions. Those lows occurred in July 2010, October 2011, and June 2012. Each was followed by a new round of buying and resulted in new highs for the move until the most recent short to intermediate-term high on September 14 when the S&P 500 peaked at 1454.71.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

It was after the last two intermediate-term rallies that statistics on the indicator front became interesting. All of our key indicators confirmed market strength toward the market highs of May 2011 when the S&P 500 peaked at 1370.58. From March 2009 until that point the S&P gained just under 106%. Thereafter, however, NONE of our indicators including the Most Actives Advance/Decline Line (MAAD), the Call/Put Dollar Value Flow Line (CPFL), Cumulative Volume (CV), or Momentum on the long-term cycle confirmed strength in the S&P. While the S&P gained 37% from October 2011 through the September 14, 2012 high, it only gained 7.5% from that spring 2011 peak and the point at which the bull trend was re-affirmed on the upside, until September 2012.

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

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

It is that lack of indicator confirmation over the past year and a half that continues to be the issue on the Major Cycle. While MAAD, our key measure of Smart Money, has participated in all of the rallies since March 2009, participation has been lackluster. In addition, since the September highs, Daily MAAD, after failing to better its March 20 peak, as the S&P rallied into mid-September, has moved sharply lower. In fact, Daily MAAD was last positioned to sink below its June support lows. While Weekly MAAD remains better positioned in that it hasn’t deteriorated as much as has the more sensitive near-term daily indicator, the fact that both have shown little enthusiasm on the upside is a cause for concern on the longer term 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.

In sum, while the market is reflecting short-term “Oversold” conditions in virtually all of our key indicators, in the face of a band of support in the S&P 500 formed last July and trailing 200-Day Moving Averages, we could see some short-term rebounding just ahead. But at best, we suspect such strength should prove to be short-lived and unsustainable because the bias of the larger and more important Intermediate Cycle has very likely changed from net positive to net negative. In addition, how that intermediate trend plays out in the weeks ahead under the onus of a series of negative indicators will determine the staying power of the long-term trend in effect since March 2009.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD was hammered again last week and not only declined to a new short-term low for the move initiated after it reached a peak on September 14, but the indicator was last positioned to seriously threaten the June lows if further selling develops. While it’s true the Daily MAAD Ratio remains in “Oversold” territory, that ratio has been “Oversold” for the past month, another sign the market may be in the early stages of a new Intermediate Cycle negative. In other words, in other “Oversold” instances following the June lows, downside extremes in the indicator were followed by higher prices via a near-term buying opportunity. That has not been the case this time around.

In addition, the marked failure of Daily MAAD to confirm S&P prices to new highs for the move after Daily MAAD peaked back on March 20 is a sign that strength in the S&P from June 4 through September 14 was fueled my weaker hands. Breadth in that advance was weak. Underscoring all of this is the fact Weekly MAAD has refused on two occasions since the spring of 2011 to confirm higher S&P pricing. That is a marked negative on the Major Cycle that has been underway since March 2009.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL on both the Daily and Weekly cycles continues to reflect a lack of enthusiasm for the stock market as measured by the activity of options players on a Dollar Value basis. After peaking February 25, 2011 nearly two months before the S&P 500 hit its intermediate high at 1370.58, CPFL has confirmed none of the strength in the S&P since then. There was some marginal improvement after the October 2011 price lows, but strength has been anemic.

In other words, like our other indicators, CPFL continues to suggest market strength over the past 18 months is suspect and that the longer-term staying power of this market should be viewed with skepticism.

Conclusion

More selling last week in the major indexes solidified what we continue to think is the beginning of an intermediate Cycle reversal to negative. Given the proximity of pricing to 200-Day lines and some lateral support made last July, prices could find some footing in the sessions just ahead. In the face of apparently “Oversold” near-term statistics, a rebound could follow.

But we also suspect that any near-term price improvement, if it does develop, will prove to be short-lived and unsustainable. The ongoing deterioration in our key indicators such as MAAD underscores our belief this market has been living on borrowed time for far too long. Put another way, nothing but new highs in the S&P 500 above the September 14 intraday high at 1474.51 would re-assert the Major Cycle uptrend begun in March 2009 and the Intermediate Cycle advance initiated after the June 4 lows.

*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.