Indexes make new highs on volume spike, while key indicator fails

Weekly Review: MAAD & CPFL Report

 

Market Snapshot:
 

Last

Week Chg

Week %Chg

S&P 500 Index

1818.32

+43.00

+3.66%

Dow Jones Industrials

16221.14

+465.78

+2.96%

NASDAQ Composite

4104.74

+103.76

+2.59%

Value Line Index

4297.88

+119.77

+2.86%

Russell 2000

1146.47

+39.42

+3.56%

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

Last week we received an email from a reader asking for definition on “the cycles” to which we often refer. He asked, “What do those all mean?”

In a nutshell, most everything in the universe is cyclical and moves from one extreme to another. Whether you’re talking about politics, weather, hemlines, or the stock market, perpetual change is the norm. Imagine a sine wave that oscillates from high to low points like an FM radio wave. In the market we call those high and low points “Overbought” and “Oversold.” What we watch for in pricing is the extremes on the upside or the downside, the anomalies. In other words, if a market or individual issue is at an extreme level, for example on the upside, it will display “Overbought” conditions. It will be at the top of the sine wave. But depending on the duration of the trading cycle being analyzed, cyclical extremes may vary.

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

 

Recent High

Upside Target

Diff / 12-20

Diff / 9-27

S&P 500

1823.75

1778

+2.57%

-2.7%

Dow 30

16287.84

16810

-3.10%

-6.5%

NASDAQ Comp.

4111.93

4025

+2.15%

-5.6%

Value Line

4311.00

4410

-2.24%

-7.8%

Russell 2000

1147.12

1160

-1.11%

-6.7%

12/20 Average:                                                                         -.35%                  -5.86%

In our work for these commentaries we use three cycles – Minor, Intermediate, and Major. The Minor, or short-term, trend usually lasts from several days to a few weeks. The data we use to determine that cycle is Daily data consisting of a High, Low, and Close. Daily Volume is also a part of the equation, but that is calculated separately. The Daily data that creates the Minor Cycle trend does not operate in a vacuum. It develops within the context of the next Larger Intermediate Cycle that is composed of Weekly data also consisting of a High, Low, and Close. This trend usually lasts from several weeks to several months. The current Intermediate Cycle that began November 16, 2012, and that has lasted relatively unabated for over a year, is beyond the norm in terms of its maturity.

Market Overview – What We Know:

  • All major indexes closed at new highs last week.
  • Market volume spiked higher by nearly 26%.
  • After flirtation with Minor Cycle negativity following November 29 near-term peak (1813.55—S&P 500), S&P put in place near-term low last Wednesday (1767.99) and must now sink below lower edge of 10-Day price Channel (1782.85 through Monday) to suggest more negative short-term tone. Intermediate Cycle remains positive until lower edge of 10-Week Price Channel (1734.97 through December 27) is penetrated.
  • VBVI, our VIX-based volatility indicator, dipped into moderately “Oversold” territory last Tuesday (34.57%) and then worked higher as market rallied. Indicator was moderately overheated at 71.74% last Friday. Weekly, or Intermediate Cycle, VBVI was last “Overbought” at 94.30%.
  • Despite strength last week, Daily MAAD remains slightly below November 29 short-term high. Daily indicator only needs another 4 net positive issues, however, to make new high. Upside failure would confirm suggestion Smart Money is selling into strength. On week, 15 issues were positive and 5 were negative. Weekly MAAD Ratio was moderately “Overbought” at 1.44.
  • Daily CPFL hit new short-term high December 9 and best level since October 9 low at point exactly coincident with ascending uptrend line that stretches back to October 2011. Indicator improved slightly last week. Daily CPFL remains about 50% below short to intermediate-term high made June 11. Recent strength continues to look like “return action” rally in larger, negative trend. On week, CPFL Ratio was “Overbought” at 1.57.

There is also the Major Cycle, or long-term trend, that consists of monthly data including High, Low, and Closing values. This trend can last for several months to years. The trend that was initiated in March 2009 is currently just a couple months shy of five-years-old. The last leg of the Major Cycle bull that began in 1982 lasted from September 1994 until March 2000, or just over five years. The Major Cycle bear market that began in October 2007 lasted 18 months until March 2009. In other words, the “long-term” trend can vary just as can the smaller Intermediate and Minor Cycles. What ties these three cycles together is context.

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