Is recent stock market strength a victory with costs too great?

Market Overview – What We Think:

• Minor Cycle uptrend begun after November 16 lows (1343.35—S&P 500) remains intact, despite lack of overall indicator confirmation.
• Strength in Value Line index to new all-time high and S&P 500 to best closing level since December 2007 is encouraging, but is offset by fact Dow 30 and NASDAQ Composite have yet to confirm on upside with similar strength to coincident new highs. In a word, long-term uptrend initiated in March 2009 remains in doubt.
• As a consequence, larger issue remains lack of upside confirmations in index pricing in addition to failure of our key indicators to underscore market gains relative to major resistance points. Failures, until resolved, will continue to highlight notion strength since November 16 lows is only countertrend rally.
• In face of indicator non-confirmations that have prevailed since mid-2011, we continue to wonder how much longer this market will be able to shake off negative indicator divergences.

For example, last week the Value Line index rallied to yet another new all-time closing high (3277.55) with an intra week high at 3280.85. And while the S&P 500 confirmed VAY strength with its best closing level since December 2007, the S&P is still nowhere near its all-time high made in October 2007 (1576.09 intraday on October 11, 2007). In addition, neither the Dow Jones Industrial Average nor the NASDAQ Composite index has been able to better intermediate highs made in late September and early October.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

Then there are the indicators….

Short-term Momentum has confirmed none of the new highs in the S&P or the Value Line while all index pricing on the Minor Cycle is currently “Overbought.” At the same time, Daily MAAD has yet to rally to a new near-term peak and above its December 20 high, despite S&P strength. And then there is the fact the Daily MAAD cycle has only recovered about 50% of its losses since peaking on the Intermediate Cycle in March while failing to generate confirming enthusiasm as the market rallied off of the June lows. Weekly MAAD remains an abject failure to the extent the indicator peaked on April 29, 2011 and has remained in a defined longer-term downtrend since then. The Daily MAAD Ratio remains near “Neutral” (1.06) while the Weekly MAAD Ratio is moderately “Overbought” (1.25).

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

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

Our Call/Put Dollar Value Flow Line (CPFL) has rallied to a new short-term high over the past several sessions and since the December 18 S&P near-term highs, but the Daily CPFL Ratio has moved into extremely “Overbought” territory (2.81) while the Weekly CPFL Ratio remains toward “Oversold” territory (.89). While Weekly CPFL has been in a shallow uptrend for the past year, the indicator remains well below a major resistance high made the last week of February 2011.

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.

Underscoring all of these trends including index and indicator divergences is the fact that while the S&P 500 gained nearly 106% from March 2009 through early May 2011, since then the S&P is up only 7% as the risks from upside non-confirmations in price and indicators have increased. While there is no denying the fact all indexes made significant lows in March 2009, since May 2011 trending has become increasingly problematic. Until there is some synchronicity in most aspects of this market, scattering will continue and the ability to determine WHERE the “trend is your friend” could remain difficult.

McCurtain Most Actives Advance/Decline Line (MAAD)

The S&P 500 rallied to new short and intermediate-term highs last week and, via its weekly closing level, to its best finish since December 2007. There is no denying that. But what is also undeniable is that Daily MAAD failed to confirm S&P strength last week after peaking back on December 20 and despite the fact Daily MAAD was leading on the upside following its lows back on November 14, two days before the broad market made its lows. Daily MAAD outperformed the S&P off of its November lows by quickly rallying above mid-September highs. Although the current, negative, short-term divergence could be eclipsed with a couple days of solid market gains, the fact there is even a divergence at this point is worrisome.

In addition, Daily MAAD remains well below a longer and Intermediate Cycle resistance high made back on March 20. The indicator has recovered about 50% of the losses suffered since March, but nothing but strength back above that previous peak would cause us to become more optimistic about longer-term S&P prospects relative to the highs made in May 2011.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Daily CPFL rallied to a new short-term high last week and kept alive the shallow uptrend in the indicator that has been extant for the past year. But the short-term trend is “Overbought” (2.81) even though the larger Intermediate Cycle in CPFL remains somewhat “Oversold” (.89).

What is also quite evident is that on the longer-term, Weekly CPFL is nowhere near overcoming major resistance put in place the week ending February 25, 2011, let alone the major highs created in June 2007. Options players on a Dollar Value basis have been more enthusiastic of late, but on the longer-term they have not demonstrated a major reversal in thinking that would presage remarkably higher market pricing.

Conclusion

Since the spring of 2011 crosscurrents in the stock market have continued to persist. While it’s true all of the major indexes are net positive in the 20 months since those 2011 highs when all of our key indicators peaked, NONE has registered anywhere near the gains that were realized in the first stages of the bull trend that originated in March 2009. While the S&P 500 rallied a whopping 106% from the March 2009 lows until early May 2011, strength from May 2011 to date has garnered just under 7% for the S&P. Put another way, for the S&P to equal that earlier gain with a new standing start on May 2, 2011 at 1370.58, it would need to rally another 1350 points to 2816 within the next four months. Is that possible? Yes, but only in lemming country with no sellers in sight. In our world, we continue to think the risk of staying substantially long this market in an environment of so many negative divergences has become, increasingly, more risky.

*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.