Stock market volatility fades, cumulative volume lags price

Stock market chart, technical analysis

The headline we savored the most last week referred to the “unloved Dow rally.” As if hearts and flowers had anything to do with the stock market. But while headline writers were able to coin a phrase, it appears the public wasn’t paying much attention since mutual fund inflows are back toward record levels. The last time such extremes occurred was in 2007 and before that in 2000 – both coincident with bull market highs. But hey, misery ultimately loves company and since little changes with the psychology of the stock market, many investors, like groupies chasing Lady Gaga, will be lured by higher prices at a point when they “just can’t wait any longer.” Then the hammer will drop. Remember several years ago when some folks believed you “couldn’t lose money buying real estate” with OPM (Other People’s Money)? You betcha.

So here we are again. Almost…. There’s a bull trend that has been underway for just over four years even though most market statistics peaked two years ago in the spring of 2011. Mama Dow and the transports have climbed to new all-time closing levels. The S&P is within reach of its October 9, 2007 all-time high (1565.15). The Value Line index traded to a new high. The NASDSAQ Composite was last at its best levels since March 2009, but remains nearly 37% below an all-time high (5132.52) made in March 2000.

Index pricing has had one thing in common over the past four years – movement in the same upward direction. That is usually the case and when the time comes for the flip side of the formula, all will be moving downward in the same direction. And once again mutual fund investors will get hammered because fund managers must be fully invested, cannot go short the market or even be in cash, and must attempt to pick those stocks to include in their portfolios that are somehow “outperforming” the S&P. Good luck. That’s why John Q gets eviscerated in bear markets and that’s why we prefer a fast, maneuverable motor boat to a blind whale.

When the most recent upsurge began in March 2009 on the heels of a devastating and the second worst decline in stock market history, many believed the aftermath would result in a “normal” recovery that would ultimately erase all of the previous losses while setting the stage for a resumption super cycle bull trend that has been in effect since the July 1932 low (40.46—Dow Jones Industrial Average). We, however, suspect the March 2000 highs were the end of a 68 year rally and that the highs in October 2007 and the slightly higher highs of early 2013 could prove to be a massive consolidation that could be preliminary to a significant retracement of the gains since 1932.

Next notice how those same CV lines have performed since the March 2009 bear market lows. They have both moved higher with index pricing, but both are still struggling to reclaim even 50% of their losses since the 2007 highs. And that’s despite the fact the Dow has made a new all-time closing high and the S&P is poised to follow suit. We should also add that CV in the NASDAQ Composite and the S&P Emini relative to the 2007 highs and the ensuing bear market are almost identical to CV patterns in the Dow and the S&P (No volume stats are available for the Value Line index, so we cannot compute CV on VAY).

Will CV in the S&P 500 and those other key indexes improve enough in the weeks and months just ahead to overcome those massive negative divergences? Wanna make any bets on that one?

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

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

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

After a little more than four years of higher prices, many believe this bull market still has a long way to go. All cycles remain positive, so what’s to worry? What’s important to remember is that the lines of supply for this market are way overextended. VERY. And while its true indicators like the Advance/Decline Line continue to make new highs, is it reasonable to assume that a ½ point advance in XYZ on 2 million shares is equal to a ½ point rally in BAC on 749 million shares? Flip the relationship, and a ¼ point drop in XYZ cancels a ¼ point gain in BAC. Seems there could be just a small weighting problem with the traditional a-d line. That’s why we like our Most Actives Advance/Decline Line (MAAD) which, although it reached its best levels March 11 since March 2009 on the Daily series, it has still only recovered 50% of its losses since the fall of 2007. That 50% retracement number just happens to coincide with CV 50% retracement levels for the same time span.

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.

So, if we were a betting man, which we are, we’ll suggest that so long as the bulls can maintain uptrends on the Minor, Intermediate, and Major Cycles, we will continue to give them a tip of the hat. But at some point, those on-balance, negative, indicator divergences underscored by a notable lack of upside volume over the past four years and diminishing volatility, which is bearish, are going to come back and haunt this market big time and that the current romance with equity “ownership” will not turn out well.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD made a new short to intermediate-term high last Monday (March 11) and in so doing also hit its best level since the March 2009 lows. But the indicator was unable to make new highs over the remainder of the week, despite higher pricing in the S&P 500. The variance is small, but it is nevertheless there. Weekly MAAD, however, has as yet been unable to better its spring 2011 peak and faltered again last week, despite a slightly higher high and its best levels since lows made in the fall of 2011.

On a longer term basis there is “no contest” between MAAD on both cycles relative to plot highs made mid-2007. Both remain 50% below those levels at points that also happen to coincide with Cumulative Volume (CV) stats that have also only retraced about 50% of their losses since the 2007 highs.

In a nutshell, and despite the fact more conventional advance/decline measurements continue to make new highs, MAAD continues to suggest that the underpinnings of this market remain wobbly on a long-term basis and that the so-called Smart Money crowd has not liked the market that began in March 2009 to the same extent it liked previous bull phases.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL rallied to yet another new short- to intermediate-term high last week via yet another strong end of week rally in Call Dollar Volume relative to Put Dollar Volume (8 to 1 on Friday). But despite gains since longer-term CPFL lows made in December 2011, CPFL remains nowhere near overcoming long-term resistance put in place the week ending February 25, 2011. That variance suggests that while options buyers have been purchasing more Calls on a Dollar Value basis relative to Puts, on the longer-term they remain unenthusiastic.

Conclusion

The bullish crowd continued to prove its point last week by forcing new all-time highs (Dow 30, 20, and Value Line index) or the highest highs since the March 2009 lows (S&P 500 and NASDAQ Composite index). But accompanying those highs are volatility numbers only slightly exceeded at the April 2010 and May 2011 intermediate-term highs. When combined with the fact that all cycles including Minor, Intermediate, and Major are historically “Overbought,” the odds are increasing that some retrenchment on the larger cycles could soon develop.

The first shoe to drop will be on the Minor Cycle. How that pullback develops will then affect the staying power of the larger Intermediate Cycle that has withstood two pullbacks since the November 16 intermediate lows. Inevitably, however, there will be a short-term decline that will persist negatively, and the still positive Intermediate Cycle will be relegated to stock market history. What happens then could determine the staying power of the major advance in effect since March 2009.

*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.