Stock market continues to perplex

Market Overview – What We Think:

• As we suggest in our Market Summary, the status of the market remains positive to extent Minor Cycle is still favorable. But the time remaining for that trend to continue is running out since “Overbought” conditions have begun to replace recent “Oversold” levels.
• With NASDAQ Composite only index of majors that has been able to make new highs, burden of proof rests on S&P 500, Dow 30, and Value Line index in terms of re-asserting long-term advance.
• Failure of other majors to make new highs, and soon, would almost immediately place focus on support lows made at the end of August (1627.47—S&P 500) since weakness below those levels would coincide with selling below lower edges of 10-Week Price Channels and points that would suggest reversal of intermediate term trend to negative.
• If prices do not follow through on upside, lingering positive flavor of such indicators as MAAD that hit new highs last week could be erased in favor of negative divergences in pricing and other market indicators. How pricing plays out relative to defined 10-Day and 10-Week Price Channels will determine whether positive flavor of some indicators is prescient, premature, or simply in error.
• In other words, until new highs are made, status of larger Intermediate Cycle underway since last November 16 remains in limbo.
• 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.

In terms of caution, when we look at charts of the S&P 500 and the Dow 30 there are some notes of familiarity, especially relative to the failed “return action” rally that followed the creation of the long-term highs made on October 11, 2007. Not only is the patterning about the same, but the time frame during which the 2007 highs was made is also about the same. The main exception now is that COMPX outlier along with MAAD, the latter of which led the 2007 peak by nearly four months. Compared to that 2007 negative MAAD divergence, this time around the indicator remains a cheer leader for higher prices and, no doubt, that is a positive sign.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

Could MAAD simply be wrong this time around to the extent Smart Money will be proven not to be so smart? Is it possible the Top volume leaders that MAAD measures are indeed the “last to go” as “quality” issues on the long-term cycle? It’s possible on both counts, because there is not such thing as a perfect indicator. The traditional NYSE advance/decline Line, currently exhibiting a negative divergence, is no stranger to that result.

Or is MAAD still correctly calling this short- to intermediate-term uptrend? Are new highs the best bet and will all of the major indexes follow the lead of MAAD and COMPX? Will the short-term lows made a few weeks ago prove to be just another corrective phase in an uptrend that was initiated on the Intermediate Cycle last November 16, and which has turned out to be a far more powerful move than many had expected?

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

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

While movement to new highs by COMPX is important and cannot be disallowed, we continue to look to the majors of the majors, the S&P and the Dow, to give us the true flavor of where this market is headed. Both have demonstrated strength over the past few weeks. But their gains have been underwhelming and remind us of kids who would rather be doing anything else than hanging out with their parents on vacation. To get them interested in current trends, something must develop to spark their interest. The door is open for higher prices in the S&P and the Dow, but given rapidly developing near-term “Overbought” conditions, that zone of opportunity has a time-stamped expiration date that will soon come due, new highs or not.

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.

In sum, going forward and in the wake of our ruminations, either the major indexes will rally to new highs to re-assert the major uptrend begun in March 2009 or secondarily the advance initiated in November 2012, or they will not. If it turns out that some of the negative divergences both in terms of price and indicators turn out to be more powerful than we suspect, and despite lingering positives, any selling below the August lows could mean that the operative noun will switch from “enthusiasm” to “commiseration.” How any pullback might develop after an upside failure could then determine the staying power of the 4 ½-year-old bull market.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily and Weekly MAAD made new short, intermediate, and long-term highs last week relative to late August low, low of November 2012, and Major Cycle low of March 2009. At the same time, however, the MAAD Daily Ratio popped to an historically “Overbought” short-term reading (2.70) last Wednesday and then backed off a bit to a somewhat less overheated level (1.97) on Friday. And while the MAAD Weekly Ratio is only moderately “Overbought” at 1.46, the margin for upside running room in both Ratios is rapidly contracting.

In other words, while MAAD has lead the market upward over the past few weeks in the face of less enthusiasm by some other indicators, the only major index that took the new highs MAAD bait was the NASDAQ Composite. Unfortunately, strength to new highs by that one index is not good enough for a broad market “huzzah.” Simply put, the S&P 500, Dow 30, and Value Line index must follow suit or the staying power of the uptrend initiated last November will be suspect, MAAD strength notwithstanding.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Almost petulantly, CPFL on both the Daily and Weekly cycles continued to languish last week. In fact, it wouldn’t take much more weakness to push the indicator to a new short-term low and to levels that would put the indicator below a long-term uptrend line that stretches back to the October 2011 market lows and the correction point on the downside that followed the spring 2011 highs.

While the Daily CPFL Ratio is also “Oversold” on the short-term, such readings early in an Intermediate Cycle reversal can be more a reflection of new developing negativity than of a buying opportunity. Considering the fact the indicator confirmed little of the rally off of the late June lows and did not make new highs with index pricing into the early August highs, the fact that it is failing now in the face of MAAD and COMPX strength is an indication options players have viewed market strength over the past few weeks with increasing skepticism. In other words, the failure by CPFL in this environment somewhat contradicts optimism evoked elsewhere.

Conclusion

Again the market contradictions continued last week. Despite new highs in the NASDAQ Composite Index and MAAD on both the Daily and Weekly Cycles, strength in the S&P 500, Dow 30, and the Value Line index was not good enough to push those indexes to new high ground also.

Problem is, the clock is ticking on the short-term rally that began a few weeks ago. Already it’s looking “Overbought.” Add in a failure to make new highs by two of the major majors and you could have the ingredients for a healthy reversal into a time of the year that has, on occasion, not been particularly friendly to the stock market.

If we were to compare current market action, despite pockets of optimism, to a couple of other fall periods, we would be more inclined to take a hard look at October 2007 long-term high and then the flash flood of October 1987. We could be accused of arguing against ourselves here to the extent we seem to be disregarding the apparent bullishness of one of our key indicators, MAAD, that traded to a new high last week. But the fact is, if MAAD is correct all is well with the market and new highs could follow in all of the indexes. If it is wrong this time out, the August price support lows become critical to the staying power of the market.

*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.