Stock market keeps rising, but anxiety looms

Stock market chart, technical analysis

Traditional chess includes an Opening, Middle game, and an End game. Even though the means can be difficult, the ultimate objective is clear – to immobilize, or “checkmate,” the opponent’s king. Chess, which is believed to have originated in India in the 6th century, like the stock market is all about goals and strategy.

There is another variant of the traditional form of the game with its 64 squares and 32 chess pieces, 16 for each opponent. It’s call “3-D Chess.” That variant was popularized in the TV series “Star Trek” where the “logical” Mister Spock would systematically eviscerate unwitting opponents. Three-D employs two additional dimensions, one higher and one lower to more closely approximate warfare above (air) and below (underwater) the usual flat plane of two-dimensional chess. Naturally, with an additional 128 space variables plus the vertical components, the possibilities for chess piece movement in the 3-D version can become even more infinite, tantalizing, and puzzling.

The stock market resembles 3-D chess. On the lateral plane there is the constant adjustment between supply and demand that creates pricing. But it is with the vertical variables above and below the market at potential support and resistance points that make the market “game” more interesting. For example, when prices make a low on the long-term, that nadir can occur at a point that is higher than the previous low, or lower. If the former, it can be argued buyers have put a floor under prices before propelled bids higher. On the other hand, if prices drop below all previous price lows, then it can be argued an eventual equilibrium between buyers and sellers is what kept pricing from dropping to zero even though it appears the low came out of nowhere.

Market Overview – What We Know:

• Major indexes rallied again last week with all adding in excess of 2%. Dow Jones Industrial Average and Value Line index rallied to new all-time closing highs. S&P 500 remains shy of October 2007 peak. NASDAQ Composite remains nearly 37% below all-time high made 13 years ago this month (5132.52).
• Trading volume shrank 3% compared to previous week.
• All trends remain positive, but also “Overbought.”
• Minor Cycle remains positive until S&P 500 sinks below lower edge of 10-Day Price Channel (1501.99 through Monday). Intermediate trend remains positive until lower edge of 10-Week Price Channel (1459.67—through March 15).
• Daily MAAD rallied to best level last week since March 2009, but Weekly MAAD while close to new highs for move since March 2009, is still shy. Weekly MAAD has nevertheless returned to long-term downtrend line stretching back to 1999 and point prior to 2000 market highs.
• Daily and Weekly MAAD Ratios were last “Overbought” at 1.80 and 1.62, respectively.
• Daily CPFL popped to new short to intermediate-term high last Friday, but still remains well below major resistance put in place week of February 25, 2011.
• Cumulative Volume has rallied to best levels since March 2009, but remains well below long-term resistance peak made in spring of 2010.

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.