Stock market minor cycle negative; intermediate status looms

Weekly Review: MAAD & CPFL Analysis

 

Market Snapshot:
 

Last

Week Chg

Week %Chg

S&P 500 Index

1555.25

-33.60

-2.11%

Dow Jones Industrials

14547.51

-317.55

-2.13%

NASDAQ Composite

3206.06

-88.89

-2.69%

Value Line Arithmetic Index

3444.05

-105.20

-2.96%

Minor Cycle* (Short-term trend lasting days to a few weeks) Negative

Intermediate Cycle* (Medium trend lasting weeks to several months) Positive / Neutral

Major Cycle* (Long-term trend lasting several months to years) Positive

* Cycle status is based on S&P 500.

Modest losses in the major indexes last week put a noticeable crack in the stock market’s dike. With the short-term cycle now negative in the S&P 500, Dow Jones Industrial Average, NASDAQ Composite, and Value Line index, the issue could increasingly become “How will near-term negativity affect the next larger, and mature, Intermediate Cycle?”

Two weeks ago we suggested in our Market Summary that when “the public” finally throws in the towel, as confirmed by recent mutual fund inflows, and goes long because they not only believe they should have gotten in earlier, but because they also believe the market will continue higher indefinitely, that’s the time the market is close to a long-term high. Unfortunately, rather than chasing perceived illusions in a statistically “Overbought” market, those investors should be making more defensive bets like remaining cash or by buying market proxies that will be profitable when the market declines. But the problem for those folks late to the party is two-fold. If they didn’t have the prescience to buy equities into a bull market low when prices were in a zone of opportunity, how could they possibly know when the market has very likely entered into a zone of long-term vulnerability?

Market Overview – What We Know:

  • Major indexes lost ground across board last week. Value Line index was biggest loser (-2.96%).
  • All indexes are now negative on Minor Cycle. Intermediate and Major Cycle remain positive.
  • Market volume increased 18.5% last week.
  • S&P 500 weakness above upper edge of 10-Day Price Channel (1582.43 through Monday) would be required to reverse short-term trend back to positive. Intermediate trend remains positive until lower edge of 10-Week Price Channel (1513.68 through April 26).
  • Daily MAAD has been falling back since reaching new short to intermediate-term high April 11. Weekly MAAD hit new long-term high relative to March 2009 low on April 12, but that level was only fractionally above 2011 high and only slightly above very long-term downtrend line stretching back to peak prior to 2000 highs.
  • CPFL on both Daily and Weekly cycles reached new short to intermediate-term high on April 12, but has been unable to exceed that level since then. Indicator is nowhere near major resistance high made week of February 25, 2011 and has only retraced about 50% of its decline since then, despite net strength since December 2011.

Because such investors do not have the sophistication to know when the psychology of the market is changing from one of buying on weakness to selling on strength, any value-added they bring to the market is by default – they merely provide a degree of liquidity at market tops so that more astute investors can more easily sell and the reverse into market bottoms so that those wishing to buy can do so when the unwary are panicking and selling.

As we have stated before, at some point there will be a short-term high that will gain legs on the downside and will cause an “Overbought” Intermediate Cycle to also turn negative. Further weakness on the larger trend will then spill over onto the Major Cycle that will then reverse and the market environment will once again flip back to one where astute investors will be selling on strength.

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