Stocks gain, but key technical highs remain selective

Stock index, chart, technical analysis

Last week the Value Line index rallied to a new all-time closing high at 3285.89. Coincidentally, the S&P 500 rallied to its best level since December 2007 and just before the broad market entered the 2008/2009 bear market. But those performances were solos. The Dow Jones Industrial Average and the NASDAQ Composite index have yet to better intermediate-term resistance created in mid-September. Cumulative Volume (CV) confirmed NONE of the strength on the upside in ANY index and remains well below September resistance. At the same time, our Most Actives Advance/Decline Line (MAAD) continues to hold below its December 20 short-term resistance high, despite pronounced market gains into the New Year. Our Call/Put Dollar Value Flow Line (CPFL) remains in a near-term uptrend initiated after the November lows, but has yet to better September resistance. And Momentum has confirmed NONE of the recent highs on either the Minor or Intermediate Cycles.

So what’s going on?

One thing that probably perked up the interest of many investors over the past two weeks was that huge rally the first day of the year. With the Dow 30 higher by a whopping 308.41 and the S&P ahead by 36.23, many may have remembered the old adage that “As January goes, so goes the year.” Problem is, January isn’t over and since those sharp gains the S&P has only added a tiny .65%, the Dow .56%, the NASDAQ Composite .42%, and the Value Line 1.2%.

There are also some other exceptions to keep in mind. In the table above notice that of the four major indexes we follow, the Value Line index gained the most from March 2009 until May 2011, the vicinity within which ALL of our key market indicators including MAAD, CPFL, Cumulative Volume, and Momentum peaked out. And then notice that since May 2011 ALL of those same indexes have been limited to single digit returns. In other words, from March 2009 through early May 2011, the market took nearly 26 months to accrue its gains. And then from May 2011 to date, after nearly 22 months those same indexes have only been able to add from about 2% to a little less 6% of the gains made from March 2009 to May 2011. Notice also that despite the new all-time high in the Value Line index within the past two weeks, the VAY is the worst performer of the major four since May 2011.

A case in point is the movement of CV in both the S&P 500 cash index and the S&P 500 Emini futures contract since the fall of 2011 (see accompanying charts). Until the September price highs CV tracked S&P pricing. But with a downside break in November in the index with coincident weakness by CV below defined uptrend lines stretching back to October 2011, the ensuing rally carried S&P prices back above those September highs to the best levels since December 2007. But not CV. In fact, CV has been working higher and back up “under” both of those trend lines broken on the downside in November and without making new short to intermediate-term highs. We view that CV failure as return action after the creation of a statistical high in September.

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

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

While, as we’ve noted before, higher prices do not a bear market make, we continue to believe the quality of the buying since November, let alone over the better part of the past two years has been remarkably inferior to the buying that developed after the March 2009 lows. The statistical divergences have been surfacing on the near-term trend over the past several weeks and have resulted in those sub par rates of return in pricing since May 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.

In sum, if we are correct that the long-term disparities in this market will bog down pricing (they already have to a large extent), then the odds are good those gains in the major indexes since May 2011 will not improve substantially from current levels. If we are not correct, the market must continue to improve in the face of, and despite, indicator negativity that has never presaged positive market returns on the long-term trend.

McCurtain Most Actives Advance/Decline Line (MAAD)

Despite new short and intermediate-term highs and best level in S&P 500 since December 2007, Daily MAAD not only failed to confirm a new short-term high last week, but also remains well below an intermediate resistance peak created back on March 20. Put another way, Daily MAAD has confirmed NONE of the S&P advance for the better part of the past three weeks including the huge rally on January 2. While admittedly it wouldn’t take much buying to better that December 20 near-term MAAD resistance high, it will take more than a short-term flurry to overcome intermediate-term MAAD resistance created back on March 20.

These variances in MAAD relative to S&P, or “the” market, continue to underscore the fact that since late April/early May 2011 the quality of buying has experienced noticeable deterioration. The fact that prices have been unable to gain much traction for the better part of the past two years, while MAAD has remained pessimistic, does not leave us particularly optimistic about the market’s longer-term prospects.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL rallied to a new short-term high and its best levels since the November lows last week, but the indicator has yet to overcome intermediate-term resistance created back on September 24. While the Weekly CPFL Ratio remains near “Neutral” (.96), the Daily CPFL Ratio could act as a near-term drag now that it is “Overbought” (2.11). In any case, the indicator has only recovered about 50% of its losses since the spring of 2011 and is nowhere near overcoming major resistance put in place the week ending February 25, 2011.

Near-term buying in CPFL on a Dollar Value basis has moved the indicator higher since the November lows and has kept CPFL in a shallow uptrend over the past year. But what is more evident is that while options buyers have demonstrated some enthusiasm of late, that eagerness has not equaled the buying levels in previous uptrends.

Conclusion

While higher prices do not a decline make, especially when the Value Line index rallies to a new all-time high and the S&P 500 hits its best close in over five years, ultimately it is the overall quality of movement in all indexes and indicators that determines the staying power of the market on the Major Cycle.

Since our discipline dictates that we must gauge market “health” relative to indicator “health,” we must continue to suggest that the lack of outright price infirmity is not necessarily a reason to think market underpinnings are strong. It is that latter issue we continue to note with concern, given the fact NONE of our key indicators has confirmed strength in the major indexes for the better part of the past two years and since the highs of May 2011. Point is, however, how much longer can index pricing defy a negative indicator environment?

*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.