Stock market losses leave long-term uptrend in doubt

Market Overview – What We Think:

• While recent sharp losses have certainly exacerbated negativity on short to intermediate trends, it remains to be seen whether or not near-term “Oversold” conditions will begin to take hold in sessions just ahead and some rebounding will develop.
• If near-term reversal does not occur soon, what is hanging in balance is not only Intermediate Cycle negativity, but status of Major Cycle uptrend in effect since March 2009.
• Fact that broad-based Value Line index has declined less that S&P, Dow 30, and NASDAQ Composite could be sign selling will be limited at this time, but considering ongoing deterioration in all of our key indicators, especially MAAD, burden of proof remains on bullish camp.
• It is also important to remember that “Oversold” in early stages of new decline may be merely reflection of net “negativity” and unfavorable market momentum and not of a new 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 tone of market since price highs made in spring of 2011.
• Indicators continue to suggest quality of buying has been deteriorating for months.

Our Weekly Call/Put Dollar Value Flow Line has been in similar straits. The indicator made a long-term high the week ending February 25, 1011 and has not revisited that level since then. In fact, the indicator remains not far above plot lows made in October 2011. CPFL failures on the upside continue to suggest that options players have increasingly been buying nearly as many puts on a Dollar Value basis as calls. For the sustenance of a long-term uptrend, that ratio is unacceptable.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

Our Weekly Call/Put Dollar Value Flow Line has been in similar straits. The indicator made a long-term high the week ending February 25, 1011 and has not revisited that level since then. In fact, the indicator remains not far above plot lows made in October 2011. CPFL failures on the upside continue to suggest that options players have increasingly been buying nearly as many puts on a Dollar Value basis as calls. For the sustenance of a long-term uptrend, that ratio is unacceptable.

In addition, Cumulative volume in the S&P 500 and S&P Emini futures contract has been in a marked downtrend since April 2010 to the extent lower highs were made in CV the week of April 15, 2010, another the week of February 18, 2011, and a final lower high September 14, 2012. Like MAAD and CPFL that have been trending lower over the past few years, despite participation in rallies when they occurred, CV too has been suggesting rallies have been increasingly fueled by weaker and weaker hands.

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

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

Which brings us up to the current time frame. Following the September 14 index prices highs, market weakness developed on the near term trend. That selling morphed into negativity on the next larger Intermediate Cycle. In the wake of that selling, our intermediate proprietary trading oscillators and Momentum measurements remain near “Neutral.” None are “Oversold.” While it is likely there will be a near-term rebound just ahead, that potential does not preclude more selling in the meantime since the next larger Intermediate Cycle continues to exert influence.

There has been damage to price charts over the past several weeks. It’s true the S&P continues to hold above a Major Cycle uptrend (1315) begun after the March 2009 price lows. The Major Cycle also remains intact to the extent S&P pricing remains above the lower edge of a 10-Month Price Channel (1277.32), but if that level is fractured on the downside, weakness would almost certainly result in a long-term negative signal.

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, at this point in the market cycle, the bulls have a point to prove. Minor Cycle selling has developed over the past two months with coincident negativity on the Intermediate Cycle and it remains to be seen if weakness since September 14 will prove to be merely a shorter-term blip, or something bigger. On the heels of negative indicator divergences that have persisted for at least 18 months, disparities continue to favor a long-term market peak. If we are wrong, nothing but buying back above those September highs (1474.51—S&P 500) would re-assert the Major Cycle uptrend.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD on daily cycle moved lower again last week and could sink below June 4 indicator plot low with only one more net negative down day. Such action would not bode well for market prospects on at least Intermediate Cycle that is currently negative in all of the major indexes.

The failure of the indicator to rally back above its March 20 highs following June lows is an indication that rally from June 4 to September 14 was fueled by weak hands, at least as reflected confirming activity, or lack of it, by so-called Smart Money that the indicator measures. And while Daily MAAD is currently “Oversold,” that tone is not so much a reflection of a potential buying opportunity, since it has been “Oversold” since September 28 when the S&P 500 was near 1440, as it is of net market negativity and deteriorating Momentum.

Weekly MAAD has simply been underscoring short-term negativity, but on a longer-term time frame that has been demonstrating MAAD deterioration since April 29, 2011.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL has failed to confirm market strength on the upside on both the Daily and Weekly cycles since February 25, 2011. Like MAAD, even though CPFL is computed on an entirely different set of statistics, CPFL has continued to suggest since the major indexes reached price highs in the spring of 2011 that buying in the broad market since then, as compared to the first stages of the uptrend following the March 2009 lows, was of lesser quality.

Given the fact that the S&P 500 rallied 105% from March 2009 through early May 2011 and only another 15% since the spring of 2011 (only 7.5% if an investor bought in May 2011), the risk/reward for holding equities over the past 18 months as compared to buying into the March 2009 lows has substantially diminished. Options players with their ongoing reluctance to buy call options on a Dollar Value basis as compared to puts is an indication of increasing market risk.

Conclusion

While some stock market valuation models continue to suggest the market remains “undervalued” on an historical basis, last weeks sharp losses, ongoing indicator deterioration, and a general presumption recent selling will prove to be just another buying opportunity on the long-term cycle makes us wonder if something of more negative import could be developing.

From a purely practical point-of-view, recent market weakness has not only caused index pricing to turn negative on the Intermediate Cycle, but developing threats to defined downside support levels as measured by rising uptrend lines and indicator deterioration make us wonder if this decline could be the one that will define the end of the uptrend initiated in March 2009. The ability of the market to withstand selling pressures over the next several days on the Minor Cycle will determine that uncertainty. We know the uptrend since June 2012 is over. The same may also be the case for the uptrend in effect since early October 2011. What is now the issue is the status of the long-term advance begun in March 2009.

*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.