Stock market keeps rising, but anxiety looms

On the flip side, if prices rally to a point this side of previous highs, previous buyers waiting to “get even” sell and prevent price quotes from making new highs. Or, if new highs do evolve as, for example, in the Value Line index and the Dow 30 recently, it would appear that without any resistance left and with only slightly more buyers than sellers, the rally could continue unabated.

Unfortunately, there is another variable that must be added to our 3-D market game – human psychology. While many market players will breathe a sigh of relief if new highs are made, that is also the point at which anxiety creeps into the equation since some of the euphoria is replaced by a nagging question, “Just how high can prices go?” The simplistic answer is “until they don’t,” but the more rational explanation is that “until the anxieties of sellers overwhelm the optimism of buyers.” That latter response has always been the case, and for whatever reasons selling eventually overwhelms buying EVEN IF new highs are made. Call it the ultimate market gravity. That was the case in 1929, 1987, 2000, and 2007, and it will be the case into every significant market high for as long as the stock market lasts.

Market Overview – What We Think:

• While resumption of buying following February 26 lows (1485.01—S&P 500) has resulted in new short to intermediate-term highs in all of major indexes, it is also true short-term trend has moved back into “Overbought” territory.
• With Intermediate and Major Cycles “Overbought,” those cycles will once again defer to health of short-term trend as that cycle then affects larger trends. Weakness on short-term trend could put in jeopardy intermediate advance in effect since November 16.
• While Intermediate Cycle remains positive, we must regard all short-term pullbacks as merely hesitations in larger cycle advance, including major trend that has been favorable since March 2009 lows.
• But 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.

For some time we have pointed out that following the index price highs of May 2011 (1370-58—S&P 500), none of our key indicators including long-term Momentum, our Most Actives Advance/Decline Line (MAAD), our Call/Put Dollar Value Flow Line (CPFL), and Cumulative Volume (CV), has been able to better those 2011 indicator highs.

While admittedly we did not know that negative indicator divergences were developing until after the market declined into October 2011 and then recovered and finally made new highs in March 2012, the simple fact is that unless an investor was holding longs from purchases made off of the March 2009 lows, or sometime prior to May 2011, or bought into the October 2011 bottom, the S&P buyer since May 2011 has achieved a capital gain of just 13%.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

Those facts are simple math, but what has become more difficult in the face of historically “Overbought” market conditions and the new reality that some of the bellwethers are now trading at new all-time highs, is determining where the anxiety factor in our 3-D chess game will begin to bite. Many will claim that this “new paradigm” is different because of this and because of that. Market tops are always different. No two are ever the same. What is the same is that there are always those who continue to claim that “it’s different this time.”

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

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

Until that final bid is put in place at what turns out to be a short-term high within the context of an Intermediate Cycle high that is also the Major Cycle high, we do know one thing for certain – when this market does finally make a long-term peak, in retrospect some of the same folks who claimed the market could go higher indefinitely will be the same ones observing that when the market stopped rallying when it finally did will then note that the lead up to the termination should have been “obvious.”

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.

From our point-of view, as the ultimate chess game, the stock market, continues, nothing but constant adaptation is the rule. Currently, all trends remain positive from short to long-term. Is it possible that our indicators which have not liked this market for some time are “wrong?” Not likely. They are simply suggesting that the underpinnings of this market leave more to be desired than not and that the temperature on “enthusiasm” has been falling. Given that apparent contradiction with prices going upward in the face of indicators that have not, what is an investor to do? Stay long, be vigilant, and have an exit strategy. Oh, and don’t sacrifice any pawns unless absolutely necessary because they can be valuable in an end game.

McCurtain Most Actives Advance/Decline Line (MAAD)

Scratching out a new short to intermediate-term high last week, Daily MAAD rallied to its best level since March 2009. The key word here, however, is “scratched” since the resistance high surpassed was the intermediate-term peak made last March 20. In that same time frame the S&P 500 rallied 10%.

And while Daily MAAD did better, so did Weekly MAAD. But the longer-term indicator has yet to overcome resistance made the week ending April 29, 2011. Another good week in the market could erase that disparity.

On the other hand, there is the long-term negative divergence to the extent Weekly MAAD has only recovered about 50% of its losses since 2007, whereas the S&P 500 has come back nearly 97% and has recouped all but about 25 points of its 2008/2009 bear market losses. So, while market pricing continues to reflect apparent investor optimism, MAAD that measures overall market health remains unimpressed.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL rallied to a new short- to intermediate-term high last week via strong gains last Friday. At the same time, the indicator remains nowhere near overcoming key resistance put in place the week ending February 25, 2011. That disparity suggests that while options buyers have been purchasing more Calls on a Dollar Value basis relative to Puts since a low was made in December 2011, on a longer-term basis they remain skeptical.

Conclusion

While we have discussed the movement of the S&P 500 index from March 2009 to May 2011 as it relates to the advance in the index from May 2011 to date (106% vs. 13% if an investor had used March 2009 and May 2011 as two separate investment points), there is another way to look at those gains. If the S&P declines from current levels by 11.6% it will erase all the profit from that May 2, 2011 high at 1370.58.

Although it may be true that the levels of market euphoria, a potentially negative omen, are not present in this current market to the same extent they were evident in 2000 and again in 2007, it’s also true the market over the past four years has been more institutionally driven with less public participation evident. Since the 2008/2009 crash many private investors have simply stayed away from the market. Some would argue this market is still a “Buy” until the public gets back in and is fully invested again. The other side of that argument is that the public will not be buying again en masse this time around and that our indicators have been negative for nearly two years for the right reasons.

*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.