Market higher on week, but without much conviction

Weekly Review: MAAD & CPFL Analysis

 

Market Snapshot:
 

Last

Week Chg

Week %Chg

S&P 500 Index

1655.17

+22.20

+1.35%

Dow Jones Industrials

14922.50

+112.19

+.75%

NASDAQ Composite

3660.01

+70.14

+1.95%

Value Line Arithmetic Index

3872.16

+71.62

+1.88%

Minor Cycle* (Short-term trend lasting days to a few weeks) Positive / Neutral

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

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

*Cycle status is based on S&P 500

The active word that continues to best characterize recent stock market activity is “dichotomy.” For the past month, while the Dow Jones Industrial Average, and to a somewhat lesser extent the S&P 500 index, remained under near-term selling pressures, less blue indexes like the NASDAQ Composite, Russell 2000, and the Value Line index held up relatively well. COMPX has been the best performer of the bunch and was last just under .90% from closing above its August 5 closing high at 3692.95.

Underscoring positive reflections from the NASDAQ Composite, our Daily Most Actives Advance/Decline Line (MAAD) popped to a series of new highs last week to suggest that on a broad composite basis, Smart Money has continued to buy top tier, high volume issues. Opposed to that optimism the traditional NYSE advance/decline Line (NYAD) and NYSE up/down volume (NYUD) not only failed to confirm market strength into the August highs, but their performance since then has been unimpressive. Considering the fact we have never much liked the traditional NYAD, because it is an unweighted indicator and treats all issues the same regardless of volume inputs, we remain unconvinced by NYAD.

Market Overview – What We Know:

  • Major indexes gained last week with NASDAQ Composite index up the most (+1.95%). Dow 30 remains worst performer relative to August highs.
  • Market volume shrank 7.1% on week, but that was due primarily to truncated Labor Day holiday week with only four trading sessions.
  • S&P 500 has turned marginally positive on Minor Cycle with last Friday’s close above upper edge of 10-Day Price Channel (1654.82). To suggest more negative short-term tone to bellwether, S&P must sell below lower edge of 10-Day Price Channel (1636.87 through Monday). S&P on Intermediate Cycle remains challenged, but there must be selling below lower edge of 10-week Price Channel (1649.34 through September 13) to confirm larger cycle reversal to negative.
  • Our short-term volatility indicator (VBVI) was last at 32.7%, up nearly 20 percentage points on week. Indicator was at 22% at June 24 short-term low. Weekly VBVI remains positive.
  • Daily MAAD rallied to new highs last week and was last at its best level since November 2012. On week, 18 issues were positive while 2 were negative. Daily MAAD Ratio was last moderately “Overbought” at 1.60 with Weekly Ratio marginally overheated at 1.26.
  • CPFL dipped to new short-term low last Wednesday and experienced some recovery thereafter. Indicator remains in vicinity of long-term uptrend line stretching back to October 2011. Daily and Weekly CPFL Ratios were last plotted in deeply “Oversold” territory at .42 and .67, respectively.

But NYUD is another matter since, like MAAD, it is “activity” sensitive. Why has NYUD underperformed MAAD over the past few months and is the former in error while the latter is presenting a more accurate picture of the broad market? Could be that because NYUD includes ALL NYSE issues regardless of whether they are equities or not is a problem while MAAD is very specific in what it measures – the Top 20 Most Actives issues. Could MAAD become a victim of the old adage that “quality is always the last to go?” Time will tell.

Market Overview – What We Think:

  • Tone of broad market remains positive on near term, but market temperature is tepid. This is not to say further gains won’t develop, but the longer it takes for pricing to improve, the larger the likelihood is that it won’t.
  • In background, while there are positive indicator crosscurrents such as new highs in MAAD, “Neutral” Momentum, and near-term price-based “Oversold” conditions, there are also negative contradictions such as lackluster volume and weak pricing in Dow 30 that could continue to weigh on market.
  • In addition, although short-term looks “Oversold,” such readings early in trend reversal can prove to be more a reflection of new negative trend than of a short-term buying opportunity, providing larger Intermediate Cycle is also about to turn negative. In other words, status of larger Intermediate Cycle that has been underway since lows were made last November 16 remains in limbo.
  • Clearly, how pricing plays out relative to defined 10-Day and 10-Week Price Channels will determine whether or not positive flavor of some indicators is prescient, premature, or simply in error.
  • In background there is lingering potential for problems on larger cycles in that fall period has historically been backdrop for some of worst declines in stock market history. Think October 1929, October 1987, and October 2007.

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