Stock indexes rally to new highs, while Dow lags

Weekly Review: MAAD & CPFL Analysis

 

Market Snapshot:
 

Last

Week Chg

Week %Chg

S&P 500 Index

1744.50

+34.36

+2.00%

Dow Jones Industrials

15399.65

+162.54

+1.06%

NASDAQ Composite

3914.28

+122.41

+3.22%

Value Line Arithmetic Index

4149.80

+95.73

+2.36%

Russell 2000

1114.77

+30.46

+2.80%

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

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

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

* Cycle status is based on S&P 500

Stock market action over the past several days could prove to be an important period. Aside from the fact we might be inclined to rename the Dow Jones Industrial Average the IBM Jones Industrial Average, we can’t recall the last time the broad market, including the Dow Jones Transportation Average, rallied to new highs and the venerable Dow 30 did not. The obvious answer as to why the Dow failed to make a new high last week is that IBM tanked (-12.38 and 6.7%) and fell to its lowest level in nearly two years (173.78).

Some say, “Forget the Dow and focus on the new highs in the NASDAQ Composite, Value Line, and Russell 2000 indexes are what is important.” Maybe, if you believe the bull market advance that began in March 2009 can continue upward with no worries, despite the noticeable faltering by one of its key components – the Dow.

Market Overview – What We Know:

  • All of major indexes, except Dow Jones Industrial Average, rallied to new bull market highs last week. Dow closed Friday just under 2% below its September 18 new, and intraday, high (15709.58) made back on September 18.
  • Despite higher prices, overall market volume declined 2.6% on week.
  • Positive on Minor Cycle, S&P 500 must decline below lower edge of 10-Day Channel (1672.68 through Monday) to suggest more negative tone. Intermediate Cycle remains positive until lower edge of 10-Week Price Channel (1658.13 through October 25) is fractured.
  • Our short-term volatility indicator (VBVI) was last into lower reaches of “Overbought” territory (83.0%). VBVI remains positive, but vulnerable at 99% on Intermediate Cycle.
  • Daily MAAD eked out new short-term high last Friday and best level since March 2009 and remains above uptrend line stretching back to November 2012 intermediate-term lows. On week, 16 issues were positive and 4 were negative with Weekly MAAD also hitting new long-term high.
  • Daily CPFL hit new short to intermediate-term low October 9 and perked marginally higher on higher pricing last week, but enthusiasm of options players remains unenthusiastic. They have continued to buy more Puts on Dollar Value basis than Calls since June 11 indicator highs.

It doesn’t take advanced calculus to figure out this bull market is mature by many measures. It’s only a little over four months shy of its fifth anniversary and many have begun to accept the notion that each short-term pullback is merely another buying opportunity. Been there. Done that. In fact, since the Intermediate Cycle lows made last November 16, there have been at least seven such short-term opportunities. Our Most Actives Advance/Decline Line (MAAD), a resolute cheerleader for higher prices over the past year also made a new high last week on both the Daily and Weekly time series. Cumulative Volume (CV) finally came through with a new high in the cash S&P 500. CV in S&P and NASDAQ futures is still well short of new highs, but at least they are both headed in the right direction.

Market Overview – What We Think:

  • With three of five indexes we follow (SPX, COMPX, and TFY) now within range of long-term upside Measured Move targets as calculated from March 2009 lows, we hold out possibility this mature bull market could be much closer to long-term high than many players expect.
  • “Overbought” conditions now evident on Minor Cycle and lingering OB stats on larger Intermediate and Major Cycles are adding credence to supposition market could be close to long-term selling zones.
  • Failure of bellwether Dow Jones Industrial Average to make new highs with other indexes is a worry since question must be posed, “How can bull market remain healthy if Dow is not participating by also making new highs?” Some would suggest failure by Dow is unimportant. We beg to differ since that negative variance creates a psychological, if not actual, divergence it is difficult to ignore.
  • While MAAD was able to reach a new bull market high last Friday, positive margin in MAAD was only six issues as compared to indicator’s September 18 high. And it occurred a day after S&P 500 hit a new high last Thursday.
  • There is also reality market has entered that time of year that has occasionally been backdrop for some of worst declines in stock market history. Think October 1929, October 1987, and October 2007.

But there are problems in the wings. First, the problem with the Dow 30 is evident. What are the implications for the Top 30 if one of its key components, IBM, hits a new two-year low? IBM peaked back in February at 215 and then generated a long-term sell signal at the end of August (182.27). That IBM action is a big chunk of the Dow. Second, all Cycles, including Minor, Intermediate, and Major are “Overbought” using price-based data. Third, our VIX-based Volatility Indicator (VBVI) moved steadily higher over the past week and was last plotted at 83.0% as compared to the September 18 market high when VBVI was plotted at 92.4%. Fourth, while our Call/Put Dollar Value Flow Line (CPFL) finally moved off the dime into the end of last week, as the number of Calls purchased on a Dollar Value basis exceeded Puts. But CPFL peaked back on June 11, has been in a downtrend since then, sank below a long-term uptrend stretching back to October 2011 in early September, and has yet to better long-term highs created in February 2011 just before the most severe pullback in this bull market.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

It is that corrective phase that lasted from May 2, 2011 (1370.58—S&P 500) until October 4, 2011 (1074.77—S&P 500) that could prove to be an important reference level in this bull market. On occasion, what could be the mid-way point of a market move or the second part, when compared to the first leg up of the trend, can be used to estimate the eventual high of that trend. As a general rule, the “internal” mechanics of the third part of the move tend to be less powerful than during the initial phase both in terms of Volume and Momentum. In the third stage the “quality” of buying driving prices higher is inferior to the first stage. Nonetheless, higher prices can follow and new highs are made during the third leg. In our September 27 Market Summary we presented a table with upside “Measured Move” targets for the major indexes. In the updated table below we fine tuned those upside targets.

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

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

Long-term upside “Measured Move” targets as calculated from March 2009 bear lows

 

Close 10/18

Upside Target

Difference

S&P 500

1744.50

1778

-1.92%

Dow 30

15399.65

16810

-8.37%

NASDAQ Composite

3914.28

3921

-.17%

Value Line

4149.80

4414

-6.00%

Russell 2000

1114.77

1126

---

In this table it is evident that the Dow 30, the market’s current worst performing index, is also the furthest from its upside target (-8.37%) and that the bellwether S&P 500. NASDAQ Composite, and Russell 2000 indexes have fulfilled the lion’s chare of their goals. So either the Dow 30 and the Value Line index are merely lagging the other indexes relative to upside price objectives, or there is some prescience in their action, considering the fact the SPX, COMPX, and TFY could be suggesting this bull market could be in its last stages. 

Index Price Channel Stops (10-Bar MAs of Highs/Lows ) Weekly Monthly
 

10/21

10/22

10/23

10/24

10/25

10/25

10/31

S&P 500 Index

SELL 1672.68

SELL 1676.88

SELL 1681.67

SELL 1688.57

SELL 1698.60

SELL 1658.13

SELL 1478.59

Dow Jones Industrials

SELL 14944.13

SELL 14981.99

SELL 15020.63

SELL 15067.58

SELL 15126.27

SELL 15060.15

SELL 13737.33

NASDAQ Composite

SELL 3735.68

SELL 3743.95

SELL 3756.38

SELL 3769.68

SELL 3792.76

SELL 3627.83

SELL 3099.00

Value Line Index

SELL 3974.48

SELL 3983.81

SELL 3993.92

SELL 4009.66

SELL 4032.25

SELL 3871.30

SELL 3285.29

Russell 2000

SELL 1061.01

SELL 1063.66

SELL 1067.56

SELL 1071.98

SELL 1079.12

SELL 1028.78

SELL 3285.29

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.

While this bull market in effect since march 2009 has defied bearish expectations before, it is a certainty it will end. Going forward, it will be important to monitor the extent of each short-term pull back in price and how MAAD responds before, during, and after each pull back. If MAAD begins to falter in the face of higher prices there would be a suggestion the Smart Money crowd had begun to sell on strength (last week MAAD eked out a new high by only six issues on Friday to better its previous high made September 18). That would be the first instance of such selling since last November when Daily MAAD popped to a new high on December 11, 2012 and more than a month before the S&P hit a new high on January 17, 2013. Given a best case scenario, MAAD will lead with a negative divergence into the next important high, and possibly into the final bull market high.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD rallied to a new high last Friday and bettered its September 18 long-term high and best level since March 2009, but the positive issues that created that new high were only six in number and the high came a day after the S&P 500 had already hit a new high. Although that small divergence may prove to be unnoticeable in the sessions just ahead, providing the broad market rallies to additional new highs, it is nevertheless a small sign Smart Money may have begun pulling back from the market to the extent they have begun to diminish their buying.

It is also true that MAAD on either the Daily or Weekly Cycles has created no kind of negative divergence, a sign that overt negativity at this point could be premature. But it is nevertheless necessary to begin looking for potential divergences, given the maturity of the long-term trend, “Overbought” pricing, and the fact the majority of the indexes we follow have moved within range of long term price targets.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL perked a bit higher at the end of last week, but the overall response of options players to recent strength has been tepid, at best. With CPFL continuing to hold well below its June 11 high and the best level of the rally in the indicator that began in October 2011, the fact that options investors have been buying more Puts on a Dollar Value basis than Calls for the past four months is a concern. The fact that that late May/early June period during which Momentum based on pricing peaked, there is every reason to believe options players are being extremely cautious.

As far as CPFL is concerned, nothing but new highs in the indicator would erase its current negative divergences both relative to the June 2013 high and the longer-term high for the current bull market created in February 2011. In both cases we suspect the odds of such action are remote, which is another way of saying this indicator that measures the long-term temperature of the market is not bullishly feverish.

Conclusion

If, as we suggest in our main Market Summary, the stock market is approaching an important long-term top, we would look for an increasing number of negative divergences. Under such a scenario the Dow Jones 30 would continue to fail on the upside, as a number of its components also weaken. Upside Momentum on the larger cycles would continue to fail. Cumulative Volume (CV) that eked out new highs in the cash instruments would become more assertive on price weakness. MAAD would falter and perhaps begin to trace out negative divergences relative to pricing.

But the bottom line will remain the same – to keep this bull market alive, all of the major indexes must make new highs or the odds are good this bull trend could be approaching a final high. Here we underscore the word “all.”

MAAD daily data for past 30 days*

CPFL daily data for past 30 days

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

9-9-13

18

2

9-9-13

14877

16433

9-10-13

15

5

9-10-13

37460

21548

9-11-13

15

5

9-11-13

15050

30730

9-12-13

3

16

9-12-13

16370

23336

9-13-13

14

5

9-13-13

10668

4246

9-16-13

12

7

9-16-13

25807

43346

9-17-13

17

3

9-17-13

17778

10023

9-18-13

20

0

9-18-13

44523

34687

9-19-13

9

11

9-19-13

26912

17440

9-20-13

3

17

9-20-13

34321

28948

9-23-13

6

14

9-23-13

14829

37355

9-24-13

7

13

9-24-13

25829

49430

9-25-13

10

10

9-25-13

10517

39419

9-26-13

11

9

9-26-13

17990

17811

9-27-13

7

13

9-27-13

2903

47777

9-30-13

5

15

9-30-13

19369

35964

10-1-13

17

3

10-1-13

9773

21260

10-2-13

14

6

10-2-13

24406

27104

10-3-13

2

18

10-3-13

51247

60320

10-4-13

18

2

10-4-13

78764

19149

10-7-13

7

13

10-7-13

11648

18960

10-8-13

1

19

10-8-13

69751

123128

10-9-13

11

9

10-9-13

13513

37755

10-10-13

18

2

10-10-13

62726

43712

10-11-13

10

10

10-11-13

38212

37220

10-14-13

17

3

10-14-13

43546

44435

10-15-13

4

16

10-15-13

15112

18252

10-16-13

15

4

10-16-13

27340

16723

10-17-13

15

4

10-17-13

80828

10441

10-18-13

15

5

10-18-13

67955

55686

*Note: Unchanged issues are not counted.

 

MAAD weekly data for past 30 weeks**

CPFL weekly data for past 30 weeks

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

3-29-13

13

7

3-29-13

46289

19185

4-5-13

7

13

4-5-13

36138

75905

4-12-13

17

3

4-12-13

102421

24788

4-19-13

5

15

4-19-13

77064

98927

4-26-13

16

4

4-26-13

69002

47733

5-3-13

18

2

5-3-13

106307

39059

5-10-13

16

4

5-10-13

101919

27785

5-17-13

16

4

5-17-13

264768

40669

5-24-13

7

13

5-24-13

133188

105220

5-31-13

10

10

5-31-13

52189

172660

6-7-13

14

6

6-7-13

208337

89250

6-14-13

6

14

6-14-13

84672

121886

6-21-13

4

16

6-21-13

47968

226866

6-28-13

16

4

6-28-13

102801

64660

7-5-13

11

9

7-5-13

79591

26170

7-12-13

18

2

7-12-13

145875

46051

7-19-13

12

8

7-19-13

60057

30066

7-26-13

9

11

7-26-13

39694

27418

8-2-13

16

3

8-2-13

52347

54888

8-9-13

9

11

8-9-13

44818

132161

8-16-13

5

15

8-16-13

49366

206060

8-23-13

12

7

8-23-13

39357

90644

8-30-13

1

19

8-30-13

64499

287292

9-6-13

18

2

9-6-13

62543

58305

9-13-13

18

2

9-13-13

89735

66677

9-20-13

17

2

9-20-13

99524

121395

9-27-13

9

11

9-27-13

41276

194942

10-4-13

10

8

10-4-13

55191

147092

10-11-13

11

9

10-11-13

204436

146198

10-18-13

16

4

10-18-13

254565

87370

**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.

About the Author
Robert McCurtain

Robert McCurtain is a technical analyst/market timer, private investor and financial markets consultant based in New York City. He can be reached at traderbob@nyc.rr.com.

If you would like to read more about how the CPFL is constructed, read a Futures article on the concept. This link will take you to the MAAD article. A two-part series about system development with the MAAD also is available. 

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