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

Weekly Review: MAAD & CPFL Analysis

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.

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