Stocks gain, but key technical highs remain selective

Market Overview – What We Know:

• Major indexes posted small gains last week with Value Line index rallying to new all-time high. S&P 500 closed at best level since December 2007. But Dow Jones Industrial Average and NASDAQ Composite have yet to confirm S&P or VAY by similarly breaking above key resistance levels.
• While Minor and Intermediate Cycles remain positive in all majors, Cumulative Volume (CV) did not confirm strength in S&P or VAY.
• Market volume rose by 17.2% last week.
• To signal Minor Cycle negative S&P 500 must sell below lower edge of 10-Day Price Channel (1433.63 through Monday). Intermediate Cycle remains positive until S&P falls below lower edge of 10-Week Price Channel (1388.08 through January 18).
• After peaking back on December 20, and despite new short-term high by S&P 500, Daily MAAD has yet to better December 20 peak to underscore S&P enthusiasm. Indicator also remains well below intermediate resistance created back on March 20. Daily and Weekly MAAD Ratios were last moderately “Overbought” at 1.37 and 1.22, respectively.
• Daily CPFL rallied to another short-term high last week, remains “Overbought” (2.11), and is in an uptrend initiated in December 2011. CPFL was positive by 4.07 to 1 last week with Weekly CPFL Ratio “Neutral” at .96. Major and long-term resistance persist in indicator at February 25, 2011 high.
• Cumulative Volume (CV), while moving upward with prices since November lows, has continued to under perform relative to S&P 500 pricing.

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.
• While strength in Value Line index to new all-time high and S&P 500 to best closing level since December 2007 last week were positive points for bulls, fact that Dow 30 and NASDAQ Composite have yet to confirm similarly on upside with coincident indicator validation is worrisome. In a word, in spite of apparent bullish “tendencies” since first of year, uptrend initiated in March 2009 remains in doubt.
• So long as pricing and indicators are not in synch on upside as they were from March 2009 until May 2011, lingering long-term doubt will persist, let alone gains since November lows that have also not been underscored by positive indicator movement relative to prices.
• In face of indicator non-confirmations that have prevailed since May 2011, we continue to wonder how much longer this market will be able to shake off unfavorable indicator divergences.

While its true MAAD, CPFL, CV, and Momentum have all remained in step with the major indexes when they rallied and then moved lower when the market declined, the problem is that uptrends have been met with less enthusiasm since May 2011 than have downtrends.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

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.