Stock market's rally since November not feeling any warmer

Stock market analysis

Nope. After nearly 3 ½ months of trying and despite a decent rally from the mid-November lows (1343.35—S&P 500) that brought the S&P within a few percentage points of its September 14 intermediate high (1474.51), and the best level since the lows of March 2009, the stock market remains as uncommitted as it was in early fall. While it’s true the Value Line index rallied to a new all-time high (3187.27) on December 20, that level was only a little over 1% better than the VAY high (3149.52) reached during the first week of May 2011. That is significant, because on a relative basis and despite the fact it has yet to make a new all-time high, the S&P 500 has outperformed VAY to the extent the S&P was last 2.3% above its May 2011 peak while the VAY had slipped back to a loss of 1.4% compared to May 2011.

Market Overview – What We Know:

• On noticeably lighter holiday activity, major indexes pulled back modestly last week.
• Market volume diminished 58% as compared to previous week.
• Short-term trend turned negative and S&P 500 must now rally back above upper edge of 10-Day Price Channel (1439.28 through December 31) to suggest reversal of near-term trend back to positive. Intermediate Cycle remains negative until S&P 500 rallies above upper edge of 10-Week Price Channel (1426.37 through January 4)).
• Strength above September 14 S&P 500 intraday high at 1474.51 would be required to re-assert bull market begun in March 2009.
• Daily MAAD has continued to move lower since peaking on December 20. Daily and Weekly MAAD Ratios were last near “Neutral“(.88 and .96, respectively).
• CPFL was negative by 2.5 to 1 last week on sharply lower options volume. Weekly CPFL Ratio was “Oversold” at .72.
• Cumulative Volume (CV) in both S&P 500 and S&P Emini has continued to under perform relative to S&P 500 pricing since November 16 short-term low.

From our point-of-view, not only has the broad market been struggling to gain traction on the upside since May 2011 when all of our key indicators peaked, but despite at least three attempts on the intermediate cycle (October 2011, June 2012, and most recently in November 2012), investors who have based their decisions on movement in the major indexes have continued to see little net improvement in portfolio valuations for the better part of the past two years. Of course there have been exceptions to that rule. Apple (AAPL) nearly doubled in the same time frame before pulling back nearly 200 points and 30% after the September 2012 highs. But on the flip side, Netflix (NFLX) sank more than 80%.

Market Overview – What We Think:

• While short-term trend has quickly corrected back toward “Neutral” levels over past several sessions, what is important about reversal of recent short-term rally begun after November 16 lows (1343.35—S&P 500), is that S&P 500 has been unable for past 3 ½ months to better high (1474.51) made back on September 14.
• Because long-term trend remains intact to extent uptrend remains positive, nothing but strength above that September 14 S&P high (1474.51) will re-assert bull trend that is about to its fourth year.
• If a presumption is made that new highs will follow, given fact Value Line index made new all-time high on December 20, then why have NONE of our key indicators that have reliable long-term records not been prescient enough to also predict new highs?
• And why, if this bull market is so healthy, have ALL of the major indexes been limited for the better part of the past two years to percentage gains that could have been exceeded by holding far less risky investments?
• Quite simply, another failure on the upside will only underscore notion that strength over past two years has been increasingly driven by weaker and weaker hands. In that vein, we continue to wonder how much longer this market will be able to shake off negative indicator divergences.

Our point? Except for those investors very adept at picking market lows in the broad advance that began in March 2009, or groups of stocks that have done better than the major indexes, investors relying on investments geared to mirror action in the major indexes have not done well for nearly two years. That lack of performance might have something to do with deteriorating market volume, but we suspect it may ultimately have more to do with the fact that strength since March 2009 will prove to be no more than a massive retracement rally following the highs made in early 2000 and October 2007. Shrinking volume in an uptrend, whether on short or long-term cycles, usually means the same thing – investor interest is diminishing.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

A couple of weeks ago we pointed out the failure of Cumulative Volume (CV) using Monthly data since the March 2009 lows. And how the 2007-2009 bear market witnessed a huge spate of liquidation as that negative trend progressed into its end game. Simply put, and despite a strong recovery in equity prices since the early 2009 lows, the underpinnings of this bull trend are nowhere near the quality of market internals prior to the run into March 2000, or the bull trend that began in October 2002 and ended in October 2007.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD continued to pull back last week as Daily MAAD Ratio poked into “neutral” territory. From a bullish perspective, it could be argued that the elimination of short-term “Overbought” conditions have reset the near-term cycle for another rally. On the flip side, while Daily MAAD did rally strongly after the November 16 market lows, the indicator has only retraced about 50% of its losses since the indicator peaked on the longer-term back on March 20. That prescience prior to the April/May correction has left MAAD with a significant negative divergence that has yet to be erased.

In addition, there is the long-term negative divergence in Weekly MAAD that peaked in late April 2011 and then failed to confirm market strength into the highs of April 2012 and again in September 2012. It could be argued that with the Weekly MAAD Ratio back at “Neutral” there is upside opportunity. It could also be asserted that the ongoing upside failure of the indicator since the spring of 2011 with only coincident small gains in the major indexes should be a cause for investor concern, not optimism.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL remains in a shallow uptrend begun in December 2011. And while the indicator has been demonstrating some improvement since the November index price lows, it has only recovered about 50% of its decline since the September highs. At the same time, it has recovered little of the losses since peaking back on February 25, 2011.

Bottom line with CPFL is that options traders have been buying marginally more calls than puts on a Dollar Value basis over the past year, but on the long-term trend they remain unimpressed with the prospects for remarkably higher stock market prices.

Conclusion

The reversal of the short-term trend to negative last week was not unexpected, but in the face of below normal market activity, we always wonder how trustworthy such a decline really is. When the majority of market players return from holiday over the next several days, the authenticity of that decline will be proven.

Holiday or not, the truth is that for the past 3 ½ months the major indexes have been unable to make a substantial dent in major resistance. The Value Line index perked to a marginally new all-time high December 20, but even so the S&P 500 that continues to hold well below its all-time high (1576.09) made in October 2007 has still gained more since May 2011 than the Value Line index. Putting those new VAY highs into perspective, the failure of the S&P, Dow 30, and NASDAQ Composite to follow the leader while none of our key indicators have confirmed any index strength since May 2011 leaves us with less than a sanguine feeling on the eve of a new trading year.

*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.