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

Stock index, chart, technical analysis

Perched on their well-worn bar stools one Sunday afternoon, two none-too-swift sports promoters are engaged in a heated conversation about winners and losers. Getting nowhere, as they attempt to determine what constitutes a real winner, one finally says, “OK. I’ll bet you $1,000 that a stable of 20 lemmings can beat ANY 20 racehorses. And I’ll back the lemmings.” Delighted with the bet, the second promoter says, “You’re on.” A date and place for the race is set.

The race is held. In the uneven contest, initially the horses out run the lemmings by miles, but the horses get loose and are left running all over the countryside. Undeterred by the galloping chaos, the horse promoter confronts the lemming backer and says, “You lose. I win. Pay up.” Grinning, the fatuous lemming loser, confident in his apparent pyrrhic victory, says, “ You may have won on pure mileage, but at least all of my guys were running in the same direction.” 

Market Overview – What We Know:

• All major indexes were on plus side last week with Value Line index rallying to new all-time high and S&P 500 finishing week at best closing level since December 2007.
• Market volume increased by 63% as market activity returned toward normal.
• Minor Cycle is positive and S&P 500 must sell below lower edge of 10-Day Price Channel (1416.53 through Monday) to suggest negative reversal of short-term trend. Intermediate Cycle remains positive until S&P 500 sinks below lower edge of 10-Week Price Channel (1385.21 through January 11).
• Daily MAAD has yet to better December 20 short-term high even though S&P has exceeded coincident price level. Indicator also remains well below major resistance peak reached back on March 20. Daily MAAD Ratio is “Neutral” (1.06) while Weekly MAAD Ratio is moderately “Overbought” (1.25).
• Daily CPFL rallied to another short-term high last Friday, remains “Overbought” (2.81), and is in an uptrend initiated in December 2011. CPFL was positive by 5.68 to 1 last week with Weekly CPFL Ratio toward “Oversold” at .89. But major and long-term resistance persist in indicator.
• Cumulative Volume (CV) in both S&P 500 and S&P Emini, while moving upward with prices since November lows, has continued to under perform relative to S&P 500 pricing.

So it has been with the stock market for some time. While some equities have been running all around the countryside after an initial surge (imagine the initial rally off of the March 2009 lows through early May 2011), others have been plodding along in the same direction, but without much enthusiasm. Underscoring the entire scenario there have been obvious detractors and marked enthusiasts.

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.