Low volume, year-end rally puts major indexes at new highs

Weekly Review: MAAD & CPFL Report

Market Snapshot:
 

Last

Week Chg

Week %Chg

S&P 500 Index

1841.40

+23.09

+1.26%

Dow Jones Industrials

16478.41

+257.24

+1.58%

NASDAQ Composite

4156.59

+51.85

+1.26%

Value Line Index

4358.89

+61.25

+1.42%

Russell 2000

1161.09

+14.62

+1.27%

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

Recently we were asked if market predictions for the New Year might be forthcoming. Notwithstanding the fact that we assess market action every week to the extent we offer possibilities as to possible direction based on the status of the three extant cycles we follow, Minor, Intermediate, and Major, we are more of the JP Morgan school. When queried once about the future direction of stock market prices the financier said, “It will fluctuate.” Morgan probably chose that route so that he could constantly assess and adjust to the market as it progressed. As a consequence, we will not predict that “equity prices will continue rising for the next ten years with little interruption. Period.” Such prognostications, in our humble opinion, plus $2.50 will get you a ride on the New York City subway any day of the week. We far prefer to let market pricing dictate probabilities. 

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

 

Recent High

Upside Target

Diff / 12-27

S&P 500

1844.89

1778

+3.76%

Dow 30

16529.01

16810

-1.67%

NASDAQ Comp.

4175.36

4025

3.74%

Value Line

4368.26

4410

-.94%

Russell 2000

1167.96

1160

+.68%

                                                                                                                  12/27 Average: +1.11%

Recent price action in the major indexes and in some of our key indicators has been no exception to the rule. The short-term corrective phase that lasted from November 29 until December 18, and which was then followed by another bout of buying to new highs, has been the norm for the past 13 months. With the exception of month-long pullbacks that lasted from late May to late June 2013, and for nearly a month last August, none of the Minor Cycle downtrends resulted in a reversal of the larger intermediate-term trend, let alone the major advance that has been underway since March 2009.

Market Overview – What We Know:

  • All major indexes closed at new highs gain last week. Dow 30 was biggest gainer, up 1.58%.
  • Market activity, reflecting light holiday participation, declined nearly 57% from previous week. Upcoming New Years holiday should keep volume low for next week also.
  • S&P 500 remains positive on all cycles. To turn short-term trend negative, bellwether must sink below lower edge of 10-Day price Channel (1781.94 through Monday) to indicate more negative short-term tone. Intermediate Cycle remains positive until lower edge of 10-Week Price Channel (1750.25 through January 3) is penetrated.
  • Our VIX-based volatility indicator, VBVI, dipped into moderately “Oversold” territory December 17 (34.57%) and has worked steadily higher as market has rallied. Indicator was last into lower reaches of “Overbought” territory at 89.20%. Intermediate Cycle remains “Overbought” (95.21%).
  • Daily and Weekly MAAD rallied to new highs last week, the former finally moving above its previous peak made November 29. Indicator is now in synch with pricing. Last week 17 issues were positive, 2 negative, and 1 unchanged. Weekly MAAD Ratio was moderately “Overbought” at 1.49.
  • Daily CPFL hit new short-term high last Friday and best level since October 9 low. That peak is now coincident with ascending uptrend line that stretches back to October 2011. Indicator remains 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 moderately “Overbought” at 1.57.

Via our “What we Know” vs. “What we Think” differentiations, what is important is how those three trends relate to one another. So long as near-term corrections are relatively shallow, dip into “Oversold” territory relatively quickly, and do not threaten the next larger Intermediate Cycle, then larger trend will probably continue higher, net, once the near-term correction is over. At least until that larger trend simply runs out of steam.

There will come a point when one of those near-term pullbacks will develop into something more serious to the extent Minor Cycle “Oversold” conditions persist, short-term Momentum remains in negative territory, and there is no “lift” in prices. Volume will also noticeably diminish into strength and any buying that does occur will be met with another round of selling. In other words, a strategy that had relied on buying the dips will have changed to one where selling on strength is the norm.

Market Overview – What We Think:

  • Resumption of buying last week was consistent uptrend initiated November 2012 since all short-term pullbacks have been followed by new highs.
  • Near-term corrective action that developed after November 29 short-term highs was no exception to rule and had no appreciable effect on larger Intermediate Cycle, let alone major trend in effect since March 2009.
  • With Daily MAAD once again in synch with pricing to extent indicator made new high December 23, suggestion has been re-asserted Smart Money has yet to begin exiting market in any appreciable way.
  • For bears in crowd, market strength to new highs on volume that was less than 50% of normal could suggest strength could prove to be short-lived once trading gets back to normal into new year. But with yet another holiday week via New Year’s holiday approaching, it will be telling to see if new gains hold on less activity and if buying is sustainable.
  • With failed Momentum on all cycles and near-term “Overbought” conditions now evident, burden of proof remains on shoulders of bulls.
  • In addition, given fact major indexes are now within range of long-term upside measured move targets we have calculated from March 2009 lows, we would not be surprised to see this market put in place a top of some importance relatively soon.

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