Stock indexes threaten new highs but indicators do not

Stock market, bull shadow

Yes, the bulls still have it by a small margin and not because of any sartorial elegance such as that we alluded to last week. Fact is, there still appears to be a cluster of buyers just under the market who continue to exhibit an eagerness to buy on pullbacks. As a consequence, while the short-term trend continues to remain somewhat in doubt, the larger intermediate Cycle is positive as is the Major Cycle.

With the Dow Jones Industrial Average now flirting with new all-time highs after coming within range of the October 9, 2007 close (14164.53) via intraday action to 14149.15 last Thursday, the savoring of blue chips seems to persist. But the Dow was still shy of that all-time close last Friday by 74.87 points and the October 11, 2007 intraday high (14198.10) by 108.44.

Market Overview – What We Know:

• Major indexes were slightly higher last week with sole detractor evident in marginally negative Value Line index.
• Trading volume rose 18.6% compared to previous week, but that is only because previous week was truncated with only four sessions due to holiday.
• Short-term trend remains uncertain to extent S&P 500, NASDAQ Composite, and Value Line index remain negative, but Dow Jones 30 in bid for new highs is positive.
• Confirming that action short-term Momentum is positive in only Dow 30.
• Minor Cycle stats remain toward “Neutral” while intermediate readings are “Overbought” as are Major Cycle statistics.
• To suggest positive near-term trend, S&P must rally back above upper edge of 10-Day Price Channel (1522.69 through Monday) and must surpass 1530.94 at most recent high to underscore resumption of larger Intermediate Cycle. Intermediate Cycle turns negative below lower edge of 10-Week Price Channel (1447.88 through March 8).
• Daily MAAD recovered some of recent short-term losses last week, but remains below short-term high reached February 19. Daily MAAD Ratio was last “Neutral” at .95.
• Daily CPFL remains just below new short-term high reached February 19 and was marginally “Overbought” at 1.32.
• Cumulative Volume (CV) continues to mimic price action in cash S&P, but is still lagging in S&P 500 Eminis. On longer-term basis, CV in S&P 500, NASDAQ Composite, and Dow 30 has only recovered about 50% of losses since October 2007.

There is also a larger problem with Dow 30 strength. In addition to the fact none of the other major indexes have confirmed that positive flavor in the Dow, Cumulative Volume (CV) in the bellwether 30 is nowhere near making new all-time highs. In fact, like the S&P 500 and the NASDAQ Composite, CV in the Dow has only been able to retrace about 50% of its losses in the wake of the October 2007 highs. Is that upside failure in CV since the March 2009 lows a reason for long-term concern? Yes it is, given the fact Intermediate Cycle statistics remain just as “Overbought” in the Dow as in the other major indexes.

So, should resilience in the Dow 30 be regarded as a harbinger of higher prices in the other major indexes, or should it be viewed as an end game from the old “quality is the last to go” school of market analysis?

Market Overview – What We Think:

• Despite short-term selling week ending February 22 and modest recovery since then, short-term trend remains in doubt to extent S&P 500, NASDAQ Composite, and Value Line index continue to exhibit negative bias while only Dow 30 has more positive flavor.
• Short-term trend could easily slip back into negative territory. Such action would then have impact on larger Intermediate Cycle that remains positive, but “Overbought.”
• Weakness on short-term trend overlapping and affecting Intermediate Cycle would then put in jeopardy uptrend in effect since last November.
• Nonetheless, lacking downside resolution on near term and fact intermediate trend remains positive, albeit tentatively, we cannot preclude possibility current near-term pullback could be developing within context of still positive intermediate advance and that strength above S&P 500 high on February 19 (1530.945) could occur. Such action would then re-assert Major Cycle uptrend.
• What could now be at stake is staying power of long-term advance begun in March 2009.

And so long as pricing and indicators are not in synch on upside as they were from March 2009 until May 2011, lingering doubts will persist about long-term viability of bull trend and we will continue to wonder how much longer this market will be able to shake off unfavorable indicator divergences.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD recovered a bit last week, but like the broad market was unable to better short-term highs put in place February 19. Strength since February 26 (1485.01—S&P 500) may ultimately be viewed as a small rebound into a developing Intermediate Cycle high. Daily MAAD’s failure to better intermediate resistance created nearly a year ago on March 20, 2012 and Weekly MAAD’s failure to better the 13-year-old downtrend stretching back to 1999, and just prior to the bull market highs of 2000, could compound the bullish dilemma.

Even if the market balance shifts in favor of buyers to the extent new highs are hit on both the Minor and Intermediate Cycles and in some instance on the Major Cycle, Weekly MAAD must first better its April 2011 resistance highs and then the long-term highs made in 2007. While the first obstacle could be surmounted we suspect the second will not be to suggest that while Smart Money confirmed some of the advance from March 2009, it has definitely not participated in this four-year-old bull market to the same extent it bought into previous advances. What that means is that new lows in MAAD could be made more easily and that could act as a drag on the broad market.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL action was relatively uneventful last week. Daily CPFL continues to hold below a short-term high made on February 19. The indicator is marginally overheated on the short-term trend and “Overbought” on the weekly, or intermediate, trend. But most importantly, CPFL on neither the Daily nor the Weekly cycles is anywhere near overcoming major resistance made just over two years ago during the week of February 25, 2011. That variance suggests that even though options buyers have participated to some extent on the upside since late 2011 and have purchased more calls than puts on a Dollar Value basis, they have done so with far less enthusiasm than they bought calls off of the March 2009 lows.

Conclusion

The bulls maintained their marginal edge last week to keep prices recovering following the February 26 intraday lows (1485.01—S&P 500). What is now at stake, however, is not only the viability and sustenance of the short-term trend to the extent it must be perpetuated in ALL of the major indexes with the February 19 intraday highs exceeded (1530.94—S&P 500), but there must also be a modicum of indicator confirmation even though enthusiasm in the latter is problematic.

This bull market is now into its fourth year as of this week. The lion’s share of the gains in that trend occurred during the first two years plus a couple of months. Since then the S&P alone has only advanced about 1/10th as much as it rallied from March 2009 through early May 2011. To change that rate of return in favor of the bulls the only way we can see the underpinnings of a new uptrend developing is if ALL of our key indicators get in synch with pricing and move toward new highs. Unfortunately, we continue to think such a change is a good bet.

*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.