With stock market bulls all in, could high soon follow?

Market Overview – What We Think:

• New highs in major indexes last week simply added to positive flavor, and gains, of market since November 16.
• Staying power of Minor Cycle that was re-asserted on upside last week will ultimately determine longevity of intermediate advance.
• Considering age of Minor Cycle now moving toward 10-weeks-old, near-term “Overbought” conditions, and bearish Minor Cycle volatility, odds are not on side of staying power of short-term trend.
• Nonetheless, until short-term advance does end, we must regard all pullbacks as mere hesitations in larger intermediate rally underway since November 16 and Major Cycle trend underway since March 2009.
• But so long as pricing and indicators are not in synch on upside, as they were from March 2009 until May 2011, doubts will persist as to long-term viability of Major Cycle and we will continue to wonder how much longer market will be able to shake off unfavorable indicator divergences.

One indicator, our Most Actives Advance/Decline Line (MAAD) measures the willingness of the so-called Smart Money crowd to participate in market moves. Since March 2009 Daily and Weekly MAAD have moved upward with the market when required, but have demonstrated a greater inclination toward weakness on declines. As a consequence, while MAAD is higher than it was in March 2009, its upward trajectory is much weaker than S&P 500 pricing that has not only recovered all of its losses since October 2007, but has made new all-time highs. MAAD, however, has only retraced about 50% of its losses since 2007 and would need to nearly double to merely regain its 2007 highs. From our point-of-view, MAAD in conjunction with declining market volume over the past decade-plus, is suggesting sophisticated money has been participating in this market over the past four years, but its levels of enthusiasm are lower than during previous bull trends.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

We also like is our Call/Put Dollar Value Flow Line (CPFL) that measures the willingness of options traders to buy more Calls on a Dollar Value basis than puts in a viable uptrend. If options traders are so inclined, then we can say market sentiment has an overall positive tone. The ongoing problem since March 2009, however, is that CPFL topped back in February 2011 and has yet to revisit those levels. That variance suggests that while options traders have been willing to buy somewhat more calls than puts, as evidenced by cumulative CPFL, they too have remained less enthused about this market over the past couple of years than during previous periods.

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

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

Another indicator we use to measure the bullish and bearish configurations of the market is volatility. As a general rule, volatility is at its highest at the end of a bear move and is at its lowest into market tops, depending on the cycle. Currently long-term volatility is toward historically low levels that equated with at least intermediate highs like those seen in April 2010 and May 2011. Volatility on the short-term cycle is similarly bearish. The last short-term points of opportunity on the buy side were the middle of last November, a point that coincided with the intermediate-term low, late December, and then late February. The current short-term advance has been underway for about six weeks and is mature.

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, at this point in the market cycle we are left with a familiar and repeating market conundrum – Major index prices have been able to rally to their best levels since March 2009 and, in some cases, to new all-time closing highs (S&P 500, Dow Jones Industrial Average, and Value Line index). But none of our key indicators has confirmed that strength. Others like the traditional advance/decline line have trotted along with the market, but we continue to have little faith in that unweighted indicator and prefer NYSE advancing/declining volume as a far better reflection of market strength. That latter indicator was last only slightly above its April 2010 high and, like MAAD, has only recovered about 50% of its losses since October 2007.

In sum, price remains “king,” as is always the case. And while investors do not buy indicators, the latter do give clues as to the probable and eventual direction of prices. On this Major Cycle, as far as the indicators are concerned, the party was over in the spring of 2011. Question now remains “When will the music stop?”

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily and Weekly MAAD data perked to their best levels last week since March 2009. But strength was relative, however, since both have retraced only 50% of their declines since peaking prior to the October 2007 bull market highs. The variances continue to suggest that while “Smart Money” has participated in this bull market just as it has participated in all previous bull trends, the extent to which that participation can be measured is substantially less than during earlier periods.

If the history of MAAD is any indication of what could be expected as this bull trend plays out into a major top, or even an intermediate-term high, this side of there, the odds remain good that MAAD will not muster enough upside momentum to create new highs that would underscore market gains made since March 2009. To the contrary, MAAD will probably continue to highlight the fact that while index prices have staged solid gains over the past four years, strength was not equal to advances staged in other major moves. That negative divergence could come back to haunt pricing when a bear trend does develop to the extent a lack of market underpinnings could mean a pronounced lack of buyers to prop up prices as lower bids are generated in a new, longer-term bear trend.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL rallied to its best levels since December 2011 last week, but gains were still not enough to position the indicator anywhere near highs made the week of February 25, 2011. In fact, like MAAD, CPFL has only recovered about 50% of its losses since 2007 to suggest that while options players have participated in the market during the bull trend initiated after March 2009, their levels of enthusiasm have been substantially diminished relative to other bull phases.

Conclusion

More buying on weakness propelled index prices to new highs last week. Brief weakness followed by another round of buying on the larger Intermediate Cycle has been the norm since last November. But the Momentum of this market has been fading since mid 2010 on the Major Cycle and on the lesser intermediate trends since February 2012 to the extent none has registered new highs. What is significant about those failures is that at some point those Momentum numbers, already compromised, could sink into negative territory to suggest that the trend of the market, in a period of low and bearish volatility, could be changing from one of buying on weakness to one of selling on strength.

*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.