Stock market weakness is crack in bullish armor

But there’s a caveat. While Friday’s rally appeared to have eclipsed most of the price weakness incurred earlier, market volume shrank on strength by nearly 22%. Short-term Momentum was last negative in the Dow 30 and NASDAQ Composite while maintaining a positive toehold in the S&P 500 and Value Line index by inches. And Daily MAAD, our gauge of Smart Money on the near-term, took solid hits Wednesday and Thursday, but did not respond to the same extent as did prices on the upside on Friday while it remains below a defined short-term uptrend line stretching back to the December low. CPFL popped to a new short to intermediate-term high last week, but that peak was reached on Tuesday with only marginal recovery over the next three sessions.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

What should also be a concern to the bullish camp is the fact that last week’s selling put a crack in the dike. While buyers were waiting just below the market after Wednesday’s and Thursday’s selling, the fissure is still visible. Nothing but a reversal of the currently and probably newly negative short-term trend and then new short to intermediate-term highs (above 1530.94—S&P 500) will put this market back onto its upside track. There is also another reality. The larger Intermediate Cycle that has been underway since market lows were made November 16 (1343.35—S&P 500) is historically “Overbought” and last week’s selling did nothing to erase that condition. There is also the fact that the Major Cycle trend also remains historically “Overbought.” The last time the long-term trend was deeply “Oversold” was into the lows of March 2009 with a brief pullback in our Trading Oscillators toward “Neutral” in October 2011. That condition was preceded by the “Oversold” lows made in late 2002 and July 1982.

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

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

While bull market tops are notoriously more difficult to pick than bottoms, the bull trend that began in March 2009 has three things that are not now working in its favor – volume, Momentum, and time elapsed.

In the first instance and one we have referred to before, Cumulative Volume (CV) has been noticeably absent on all cycles for nearly one half of the uptrend since March 2009. Those numbers have been reflected to some extent in our Most Actives Advance/Decline Line (MAAD) and our Call/Put Dollar Value Flow Line (CPFL). While these indicators have been in synch with index pricing up and down over the past four years, the extent to which they have moved has been the issue. All, including Momentum, were in synch with prices off of the March 2009 lows. But after the spring 2011 highs that coincidence changed. Since then NONE have made new highs. The S&P 500 rallied 106% from March 2009 to May 2011. From May 2011 to date the index rallied just over 10%.

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.

Clearly, the burden of proof continues to rest squarely on the shoulders of the bulls. And in the wake of last week’s price action it seems obvious that it would be so easy to knock the bloom of the bullish rose, because once a short-term trend takes hold on the downside, the “Overbought” Intermediate Cycle could quickly be put in serious jeopardy. The S&P currently has a trailing stop at the lower edge of its 10-Week Price Channel through next Friday, March 1, at 1433.37. That’s a little over 80 points from Friday’s S&P close. Last Wednesday and Thursday nearly one half that amount was erased in just two sessions.

McCurtain Most Actives Advance/Decline Line (MAAD)

Longer-term MAAD characteristics aside, last week’s downside break in Daily MAAD last Wednesday put indicator below a defined uptrend line stretching back to the late December low in the S&P 500 (1398.11). And while Friday’s index price rebound caused MAAD to erase some of its losses from Wednesday and follow on selling on Thursday, Daily MAAD continues to look weak and vulnerable. Not only has the indicator tagged along reluctantly as index prices rallied to new short to intermediate-term highs over the past several weeks, but Daily MAAD has not even been able to better intermediate-term resistance made last March 20.

Then there’s Weekly MAAD and the long-term trend. Last week that indicator tapped a major downtrend line stretching back nearly 13 years to the 1999 highs that preceded the early 2000 bull market highs. There was an intervening plot high in July 2007 and the most recent high. Granted that the recent contact with and downward reversal from that trend line is minimal, the fact that Weekly MAAD would turn lower in that face of that line in a market environment that has left index prices struggling with little indicator confirmation since May 2011, is significant.

Smart Money has not been enamored of the stock market for some time, and especially not since the March 2009 price lows. While the indicator has moved upward with pricing, it is the downdrafts that have been the most telling. In that latter vein we continue to suspect those variances will continue to be the true measurement of this market’s health.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Daily CPFL rallied to a new short to intermediate-term high last Tuesday, but was unable to better that level in trading over the remainder of last week. And while the indicator remains in an intermediate uptrend begun in synch with the November lows and in a longer-term uptrend begun in December 2011, the indicator is nowhere near overcoming major resistance put in place two years ago in February 2011.

While options players have certainly not completely avoided this market, the overall drift of CPFL on the longer term continues to suggest that whereas there was eagerness to buy Call options on a Dollar Value basis after the March 2009 lows, that enthusiasm virtually disappeared after the May 2011 index price highs and has not returned. That lack of bullishness as reflected in CPFL on the Major Cycle is yet another indication that this stock market does not have the statistical underpinnings it ought to have.

Conclusion

Selling last Wednesday and Thursday with lukewarm recovery in the major indexes on Friday has left a chink in the armor of the rally that began after the November intermediate term lows, let alone over the past two years and since the spring of 2011 when our key indicators peaked out.

Because there were buyers who surfaced just under the market late last Thursday and into Friday’s session, we cannot presume this market is necessarily down for the count. But there is also a truth that the rapidity of the decline last Wednesday and Thursday could translate into more concerted negativity on the short-term trend that could quickly affect an “Overbought” Intermediate Cycle that continues to face longer-term obstacles such as fading Momentum and a lack of interest as measured by investor participation.

*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.