Stock market trend still positive although indicators waning

Chart, rising, falling

The snail’s pace race occurring in the stock market continued last week in the S&P 500, NASDAQ Composite, and Value Line index, the latter of which that rallied to new all-time closing high Friday. The Dow Jones 30 were down slightly on the week. Market volume deteriorated by just under 6%. But underscoring all activity is the fact that all cycles, including Minor, Intermediate, and Major remain positive. That fact is underscored further by lingering “Overbought” conditions in all and short-term Momentum that has confirmed none of the rally to new short to intermediate highs in any of the major indexes.

There is an undeniable truth to this market, however -- non-confirmations can persist. There are times when indicators are in synch with index pricing, and there are times when the reverse is true. Since the latter condition has been evident for the better part of the past two years and since the price highs of May 2011, an idle observer could be inclined to suggest that the indicators are not working. Not so.

Indicators, at best, are early warning devices. They signal possible future changes in price trend just as meteorologists check barometric readings to determine the likelihood of a storm. And because the nature of stock market forecasting must, by definition, allow for variability in extremes, either up or down, what was deemed extreme indicator negativity at the end of one market cycle may not be quite the same in another. For example, indicator divergences into the last bull market top in the fall of 2007 began to develop about six months before the eventual top. In 2000 the lead time was nearly 10 months. In the current instance the fact that nearly all of our major indicators peaked in the spring of 2011 could turn out to less premature than ultimately prescient.

Market Overview – What We Know:

• Major indexes were somewhat mixed last week with a slight upward bias. Only the Dow Jones 30 was negative and only the Value Line index rallied to a slightly higher all-time closing high.
• All cycles, including Minor, Intermediate, and Major, remain positive.
• Market volume declined by 6%.
• S&P 500 becomes negative on Minor Cycle below lower edge of 10-Day Price Channel (1496.16) and on Intermediate Cycle below lower edge of 10-Week Price Channel (1406.37).
• Daily MAAD eked out new short-term high last Wednesday, but did not confirm S&P 500 strength to new short to intermediate-term high Friday. Weekly MAAD continues to hold below late April 2011 high, but was last positioned to threaten on upside long-term downtrend line stretching back to pre-2000 market high.
• Daily CPFL hit new short-term high last week, but remains well below major resistance high created week ending February 25, 2011. Daily CPFL Ratio was “Overbought” at 1.60 while the Weekly Ratio was overheated at 1.61.
• Cumulative Volume (CV) in S&P 500 was last at new short to intermediate high, but indicator has only recovered to level of July 2011 when S&P was bid near 1340. Overall, CV in ALL of major indexes remains weaker than pricing.

As we’ve noted before, off of the March 2009 lows and into the May 2011 highs, the S&P 500 gained just under 106%. Since those indicators peaked in May 2011, the S&P has only gained a little over 10%. Of course individual issues and other indexes have done better or worse over the past two years, but that is always the case in any market cycle. In that same time frame since March 2009 Netflix (NFLX) rallied from $34 to $304, declined back to about $53 and has since recovered toward $188. Similarly Apple (AAPL) rallied from the low 80s to $705.07 and was last near $475.

Market Overview – What We Think:

• Minor Cycle continues to look vulnerable to extent we suspect ascent of market is unsustainable in face of “Overbought” conditions and Momentum that continues to fail on upside.
• In spite of bullish price “tendencies” since November lows, uptrend initiated in March 2009 is mature. 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 range of make long-term highs in this bull trend.
• 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.
• But so long as Minor, Intermediate, and Major Cycles remain positive, however, deference must be paid to trend direction regardless of lack of indicator confirmations.

In short, the market is comprised of many themes, but the primary benchmarks we must follow are index pricing and market underpinnings. In a nutshell, while the market has made modest progress for the better part of the past two years, the majority of it since last November relative to the May 2011 highs, our key indicators have continued to lag price action. Some such as our Call/Put Dollar Value Flow Line (CPFL) have perked marginally higher over the past several months, but on a relative basis have not confirmed strength in the major indexes.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

All that our key indicators have had in common with the gains in the major indexes since the March 2009 lows and to some extent over the past two years is that they have all been moving in the same direction at the same time. All were in synch on the upside off of the 2009 lows. All peaked into the first intermediate high in April 2010 and then pulled back into the July lows. All then advanced into the May 2011 highs, pulled back, rallied to March 2012, pulled backed, rallied to September 2012, pulled back, and rallied to current bids. Point is, while synchronicity in terms of direction has been coincident since March 2009, the extent and degree of indicator movement has not confirmed price action. In other words, the higher prices have moved, the extent of each price rally has diminished as the indicators have held back.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD rallied to new short-term high last Wednesday, pulled back on Thursday, and only added a notch on the upside Friday and indicator failed to confirm new short-term high in S&P on last day of trading week. What is especially noticeable about MAAD performance since December 28 short-term low is how indicator has failed on relative basis to keep up with S&P pricing. That action is a reverse of what occurred off of the November intermediate-term lows. Then MAAD was strong and the S&P lagged a bit, while recently MAAD has been lagging as S&P has been perking higher.

The current variance between the S&P and MAAD is a suggestion that the index may have gotten ahead of itself relative to new funds Smart Money is willing to commit to a mature short to intermediate-term trend. For all of the historical reasons we have outlined before, when the current short-term cycle turns to negative and affects the intermediate trend, that movement will be highlighted by MAAD. Because MAAD on both the Daily and Weekly Cycles has been unenthusiastic for quite awhile and could suffer more downside damage with relatively little market negativity, the Sword of Damocles continues to swing in the wind over this market – recent index price gains notwithstanding.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Daily CPFL rallied to a new short-term high last Friday and the uptrend begun in December 2011 remains intact. With CPFL now above resistance created last September, the indicator can be construed as being “positive,” even though upside enthusiasm is lukewarm. But the fact is, both Daily and Weekly CPFL are “Overbought” and the indicator is nowhere near overcoming major resistance created two years ago this coming February 25.

Which means that while options players have participated in this market since the spring of 2011, they have done so at a diminishing rate as compared to options buying off of the March 2009 lows.

Conclusion

More small gains. More so-so volume. More half-hearted indicator action. That was the nature of stock market activity again last week. What has become evident since the spring of 2011 is that intermediate-term cyclicality has diminished in terms of duration and, as a consequence, the extent of moves, up or down, has also decreased. Price action since November is no exception to that rule.

What the diminution of cyclicality and price movement tells us is that the levels of commitment by either bulls or bears has become more tightly defined as compared to the grand sweeping up move off of the March 2009 lows when bulls were decidedly in control. Or the high volatility, high volume decline from the summer of 2008 into those March 2009 lows when the bears were in charge.

In a bull trend it takes both commitment and volume to sustain a move. And relative to the 106% gain from March 2009 until May 2011, we do not view a niggling 10.7% gain in the bellwether market index since then with no indicator confirmation as a reason to believe a “new paradigm” is in effect. Some indexes, issues, and some mutual funds haven’t even done was well as the S&P since May 2011. As a consequence, we continue to wonder if its Caveat Emptor time with a déjà vu kicker.

*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.