Stock market advances despite weak indicators

Weekly Review: MAAD, CPFL indicator analysis

 

 

Market Snapshot:
 

Last

Week Chg

Week %Chg

S&P 500 Index

1485.98

+13.93

+.94%

Dow Jones Industrials

13649.70

+161.27

+1.19%

NASDAQ Composite

3134.71

+20.61

+.66%

Value Line Arithmetic Index

3332.53

+46.64

+1.41%

Minor Cycle (Short-term trend lasting days to a few weeks) Positive

Intermediate Cycle (Medium trend lasting weeks to several months) Positive

Major Cycle (Long-term trend lasting several months to years) Positive / Neutral

Last week, the S&P 500 rallied to its best level in more than five years. The Value Line index hit another new all-time high. And, albeit by inches, the Dow Jones Industrial Average rallied to a new intermediate closing high to “confirm” movement in the Dow Transportation Average which, under the venerable Dow Theory, underscores a primary bull trend in the market. The problem with the latter is that Dow Theory signals are a bit “spongy” and tend to be subject to interpretation. Some have said that Dow Theory confirmed on the upside a month ago. Others disagree. Current reversals to positive have apparently changed a Sell signal generated last May. Others differ and say the Sell came in September. No, wait...

At any rate, the market rallied some last week. All cycles including Minor, Intermediate, and Major remain positive with tendencies toward “Overbought.”. At the same time, Cumulative Volume confirmed the new intermediate high in the S&P, but not in the S&P Emini futures contract. Nor in the Dow 30, or in the NASDAQ Composite that has been lagging anyway. There’s no volume reported for the Value Line index, so we can’t comment on that.

Market Overview – What We Know:

  • Major indexes recorded small gains again last week with Value Line Index hitting new, all-time closing high and S&P 500 to best level since late December 2007. NASDAQ Composite index continues to lag.
  • All cycles, including Minor, Intermediate, and Major, remain positive.
  • Market volume rose a little over 3% compared to previous week.
  • S&P 500 would signal short-term negative by selling below lower edge of 10-Day Price Channel (1458.17 through Monday). Intermediate Cycle remains positive until S&P falls below lower edge of 10-Week Price Channel (1391.74 through January 25).
  • Daily MAAD bettered December 20 short-term resistance high last Friday, but remains well below more important intermediate resistance made last March 20. Daily MAAD Ratio is toward “Neutral” at 1.07 with Weekly MAAD Ratio moderately “Overbought” at 1.42.
  • Daily CPFL rallied to another short-term high last week, but has yet to overcome resistance created last September. Daily CPFL Ratio was moderately “Overbought” at 1.63 while the Weekly Ratio was moderately overheated at 1.25.
  • Cumulative Volume (CV) confirmed S&P 500 strength last week to a new intermediate high, but did not confirm gains in S&P 500 Emini, or in Dow 30 or NASDAQ Composite.

The Daily Most Actives Advance/Decline Line (MAAD) eked out a slightly higher high by rallying above its December 20 short-term peak by a few notches. But the indicator also remains well below intermediate resistance put in place back on March 20, 2012. Our Call/Put Dollar Value Flow Line hit a new short-term high last week, but continues to remain below intermediate resistance made back in September.

Does all of this sound familiar in that the market makes selective new highs, depending on the cycle, while an array of indicators continue to flirt with negative divergences. If it does, welcome to the long-term endgame that, unfortunately, can continue for months as prices work higher with less and less underlying indicator corroboration. Although a hand might pop up with the comment to suggest that the flip to positive by the Dow Theory is a “very good sign,” we can only suggest that in respect to Dow Theory, that indicator is notoriously late and has the flexibility of a battleship in a bathtub.

Market Overview – What We Think:

  • Minor Cycle uptrend begun after November 16 lows (1343.35—S&P 500) remains intact, despite spotty indicator confirmation on upside.
  • Dow Theory confirmed bull trend with higher closing highs by Dow 30 and 20, but indicator is notoriously sluggish and late.
  • In spite of apparent bullish “tendencies” since November lows, uptrend initiated in March 2009 is mature and could very likely be much closer to an end point than not. In fact, upside “Measured move” targets calculated on a variety of cycle points suggest that on average S&P, Dow 30, NASDAQ, and VAY could be within 10% of ultimate highs in this bull trend.
  • On time scale, S&P, Dow, and NASDAQ appear to have time left to achieve goals while VAY looks overextended.
  • So long as pricing and indicators are not in synch on upside as they were from March 2009 until May 2011, lingering long-term doubts will persist, and we will continue to wonder how much longer this market will be able to shake off unfavorable indicator divergences.

One indicator we have referred to often and which has a good historical record both in terms of predicting tops and bottoms and the price movement to them is Momentum. We prefer to use Momentum in a “collective” mode by looking at separate cycles as a trend develops to determine possible upside or downside price targets. Since momentum measures the impetus of a cycle, when it begins to lose steam, determinations can be made as to where a price move might end. Also, since Momentum tends to peak toward the half way point of a move, its possible to “measure,” considering the first leg of the trend, where the next leg ought to end both in terms of time and distance.

Daily S & P 500 with Cumulative Volume (CV)

cumulative, volume, sp

Weekly S & P 500 with Cumulative Volume (CV)

cumulative, volume weekly

In the current environment, we took four measurements of the S&P 500, Dow 30, NASDAQ Composite, and Value Line index both in terms of price distance to completion of the bull trend that began in March 2009 and in terms of time used. First, long-term Momentum following the March 2009 lows in all four indexes peaked in April 2010. Momentum on the Major Cycle has not bettered those levels since then despite higher index prices. Upside targets based on those Momentum numbers suggest a long-term S&P high of 1560, Dow of 14400, NASDAQ of 3330, and VAY of 3850. Without getting into the minutiae of the calculations on the three other cycles, the average of our four Momentum measurements in terms of price puts the S&P toward 1550, the Dow at 14300, the NASDAQ at 3330, and the Value Line at 3540.

Then we looked at upside targets in terms of time used from that point at which Momentum peaked on the long-term back in April 2010. The S&P, Dow 30, and NASDAQ Composite were all just over 10% shy of equaling the time used during their first leg up while the VAY was a bit overextended at 105%. Put another way, while the S&P, Dow, and NASDAQ could play a bit of catch up in the time just ahead, the VAY might begin to stall.

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

emini, volume

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

emini, cumulative, volume

 

Index Daily / Weekly / Monthly Stops Weekly Monthly
 

1/21

1/22

1/23

1/24

1/25

1/25

1/31

S&P 500 Index

SELL 1458.17

SELL 1460.70

SELL 1462.73

SELL 1464.93

SELL 1467.39

SELL 1391.74

SELL 1310.68

Dow Jones Industrials

SELL 13364.87

SELL 13391.91

SELL 13412.96

SELL 13434.88

SELL 13465.23

SELL 12899.21

SELL 12445.73

NASDAQ Composite

SELL 3093.99

SELL 3096.53

SELL 3098.97

SELL 3104.45

SELL 3108.12

SELL 2933.93

SELL 2809.46

Value Line Index

SELL 3255.40

SELL 3262.11

SELL 3268.80

SELL 3276.07

SELL 3284.42

SELL 3012.55

SELL 2779.90

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, bullishness here and there notwithstanding, we continue to believe the stock market is a lot closer to a long-term high than not. While all cycles remain positive, as reflected in the table at the outset of this Weekly Summary, we continue to believe that the lines of supply for this market are getting thinner and thinner as pricing gets further and further down the road. As we noted in last week’s summary, while the major indexes posted historic gains from March 2009 through early May 2011, using nearly the same amount of time since then, the gains have only been a fraction of that first part of the bull market because of the inability of prices to overcome more frequent bouts of selling and because of only sporadic indicator confirmation on the upside.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD rallied to a new short-term high above its December 20 peak last Friday, but strength was by fractions and indicator has yet to overcome more important intermediate resistance made back on March 20, 2012. A case could be made that because the Daily MAAD Ratio is toward “Neutral” with the Weekly MAAD Ratio not yet fully “Overbought,” higher index prices could follow. That’s possible, and so long s all cycles remain positive we have no intention of suggesting a long-term market exit except to the extent that the higher prices go and the longer negative indicator divergences persist, the greater the risk of an end to the party.

Underscoring all of this is that while MAAD on both the Daily and Weekly cycles has participated with pricing on the upside since March 2009, following the MAAD highs of May 2011, MAAD has NOT rallied as much as it has declined during periods of market weakness and despite higher index pricing relative to those 2011 highs. That sort of negative long-term divergence is classic to the extent it always precedes market highs unless the divergence is eliminated by remarkable indicator improvement.

maad

maad

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL hit 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. That’s the repeat line we’ve used over the past several weeks. The Daily and Weekly CPFL Ratios were last moderately “Overbought” at 1.63 and 1.25, respectively.

CPFL could overcome first resistance at last September’s highs with only a bit more buying, but the major resistance high hit in February 2011 remains as a long-term obstacle just as it has in our other key indicators such as MAAD, CV, and Momentum.

cpfl

cpfl

Conclusion

The stock market continues to inch higher with sporadic confirmation relative to previous highs and resistance levels coming from pricing and indicators. But unlike the first leg up in this bull market that lasted from March 2009 through early May 2011, the lack of indicator confirmation is notable. Imagine higher highs and higher lows in prices, net, since March 2009, but higher highs and higher lows in indicators until May 2011 in indicators. And then lower highs in indicators for the better part of the past two years.

As we have pointed out before, the S&P rallied nearly 106% during the first 26 months of this long-term bull trend while in nearly the same amount of time it has rallied less than 8.5%. But since higher prices and positive trends do not a bear market make, as we’ve also noted before, the smart play at this juncture remains one of vigilance with protective stops on the downside. Imagine a terminal patient increasingly on life support with an uncertain amount of time left to live.

MAAD daily data for past 30 days*

CPFL daily data for past 30 days

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

12-6-12

13

7

12-6-12

11237

9199

12-7-12

14

5

12-7-12

21423

8692

12-10-12

12

8

12-10-12

5801

8010

12-11-12

16

4

12-11-12

58541

16935

12-12-12

14

6

12-12-12

14037

29016

12-13-12

5

15

12-13-12

16200

21122

12-14-12

11

8

12-14-12

755

2204

12-17-12

16

4

12-17-12

3965

2127

12-18-12

16

4

12-18-12

54268

15407

12-19-12

8

10

12-19-12

23234

17820

12-20-12

15

4

12-20-12

60116

9429

12-21-12

1

19

12-21-12

113448

24330

12-24-12

7

11

12-24-12

12273

4633

12-25-12

Holiday

 

12-25-12

Holiday

 

12-26-12

10

10

12-26-12

13183

9095

12-27-12

4

16

12-27-12

13740

15048

12-28-12

3

17

12-28-12

9876

20514

12-31-12

19

0

12-31-12

66137

7704

1-1-13

Holiday

 

1-1-13

Holiday

 

1-2-13

18

2

1-2-13

41038

18210

1-3-13

8

12

1-3-13

27988

14827

1-4-13

16

4

1-4-13

15918

9326

1-7-13

8

12

1-7-13

12111

9021

1-8-13

5

15

1-8-13

30884

8826

1-9-13

11

9

1-9-13

6980

9587

1-10-13

17

3

1-10-13

17253

12394

1-11-13

10

10

1-11-13

21372

8073

1-14-13

8

11

1-14-13

25044

8390

1-15-13

10

10

1-15-13

6735

7626

1-16-13

10

10

1-16-13

9145

14231

1-17-13

11

8

1-17-13

17630

15208

1-18-13

12

7

1-18-13

30618

15985

*Note: Unchanged issues are not counted.

MAAD Weekly data for past 30 Weeks**

CPFL data for past 30 Weeks

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

6-29-12

11

9

6-29-12

215980

45870

7-6-12

9

11

7-6-12

22987

66734

7-13-12

7

13

7-13-12

115325

165598

7-20-12

11

9

7-20-12

155286

106164

7-27-12

15

5

7-27-12

469554

55021

8-3-12

14

4

8-3-12

189964

56326

8-10-12

18

2

8-10-12

127913

51441

8-17-12

11

9

8-17-12

168381

34193

8-24-12

5

14

8-24-12

61567

91299

8-31-12

4

16

8-31-12

27713

56889

9-7-12

17

2

9-7-12

192729

30202

9-14-12

17

3

9-14-12

295058

62406

9-21-12

4

16

9-21-21

140898

41443

9-28-12

6

14

9-28-28

68066

104869

10-5-12

15

5

10-5-12

82790

46425

10-12-12

4

16

10-12-12

23119

203431

10-19-12

10

10

10-19-12

40632

219576

10-26-12

6

14

10-26-12

43539

151159

11-2-12

15

5

11-2-12

31681

39436

11-9-12

0

20

11-9-12

51223

261506

11-16-12

3

17

11-16-12

104817

333252

11-23-12

18

2

11-23-12

136708

34280

11-30-12

12

8

11-30-12

152468

59828

12-7-12

15

5

12-7-12

53407

49271

12-14-12

10

10

12-14-12

51445

98445

12-21-12

14

6

12-21-12

216650

126720

12-28-12

5

15

12-28-12

19431

48587

1-4-13

19

1

1-4-13

142605

25100

1-11-13

13

5

1-11-13

90566

22250

1-18-13

11

8

1-18-13

75858

37446

**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.

 

About the Author

Robert McCurtain is a technical analyst/market timer, private investor and financial markets consultant based in New York City.