First week of New Year a yawner for stock indexes, but tone positive

Weekly Review: MAAD & CPFL Report

 

Market Snapshot:
 

Last

Week Chg

Week %Chg

S&P 500 Index

1842.37

+11.00

+.60%

Dow Jones Industrials

16437.05

-32.94

-.20%

NASDAQ Composite

4174.66

+42.75

+1.03%

Value Line Index

4380.27

+30.88

+.71%

Russell 2000

1164.53

+8.44

+.73%

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

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

After a full week of nearly normal trading into the New Year, some traders may be asking themselves why they didn’t stay away another week for some more sun and fun. It’s a sure thing not much has been going on in the trenches. At the end of the week most of the major indexes were up a bit with the exception being the Dow 30 that was down fractionally. And underscoring market action is the fact that no index was able to make a new high while Minor Cycle “failsafe” levels, as measured by trailing 10-Day Price Channels, continue to rise toward possible intersection points with pricing. In other words, it wouldn’t take much more selling to turn the short-term negative. Such an event could have ramifications on the larger trend, the one we have been calling “Intermediate” for more than a year.

As this market has continued to demonstrate for months, if not since the bull market lows were made in March 2009, reports of its demise have been greatly exaggerated. We too have marveled at the staying power of the long-term trend that has persisted in the face of so many apparent and imagined obstacles. Erring on the side of caution, we continue to follow along behind price action looking for any cracks in market armor that could presage first short-term weakness, and then intermediate vulnerability that could morph into a new, long-term bear market, so reversing the nearly five-year-old advance.

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

 

Recent High

Target vs. Close

Diff / 1-10-14

S&P 500

1849.44

1778

+4.00%

Dow 30

16588.25

16810

-1.32%

NASDAQ Comp.

4182.74

4025

+3.91%

Value Line

4394.67

4410

-.35%

Russell 2000

1167.96

1160

+.69%

                                                                                                     Average above target: +1.38%

But bearish evidence has been noticeably thin for some time. Even the “Intermediate” uptrend that began in November 2012 and that has consisted of about seven, depending on your count, short-term pullbacks since the late 2012 lows, has afforded only modest and, as it has turned out, unsustainable weakness. In other words, bears have had little effect on rising prices for nearly 14 months and it remains to be seen when they will be able to assert themselves with any meaningful effect. Right now we remain somewhat skeptical of a bearish reversal for a number of reasons.

Market Overview – What We Know:

  • Major indexes had a slightly positive tone by end of last week, but Dow Jones 30 was odd index out with small loss.
  • Market volume, returning toward normal levels, rose 71% compared to New Year’s holiday week.
  • S&P 500 remains positive on all Cycles including Minor, Intermediate, and Major. To turn short-term trend negative, bellwether must sink below lower edge of 10-Day price Channel (1831.45 through Monday). Intermediate Cycle remains positive until lower edge of 10-Week Price Channel is penetrated (1766.14 through January 17).
  • Our daily VIX-based volatility indicator, VBVI, moved into lower reaches of “Overbought” territory at 91.42% last Friday, while larger Intermediate Cycle reading increased to “Overbought” at 96.22 from previous week’s 88.65%.
  • Daily MAAD rallied to new high and best level since March 2009 last Friday. Weekly MAAD confirmed by also making new high. On week 15 issues were positive with 5 negative. Weekly MAAD Ratio was moderately “Overbought” at 1.58.
  • Daily CPFL rallied to new short-term high last Friday and best level since October 9 low. That peak is coincident with ascending uptrend line that stretches back to October 2011. On week, CPFL Ratio was moderately “Overbought” at 1.83.

First, our Daily Most Actives Advance/Decline Line rallied to a new high and its best level since March 2009 last Friday. Weekly MAAD confirmed that strength. What is notable about the tone of MAAD is the fact that the indicator has either led or preceded market gains since November 2012. In those few instances where the indicator was a little behind pricing as the S&P and the other indexes moved to new highs, Daily MAAD quickly caught up and also made new highs. And then there were instances such as on March 4, April 25, July 9, and September 4, 2013 when Daily MAAD was way out in front of the indexes by making new highs before pricing.

Market Overview – What We Think:

  • All indexes were “toying” with Minor Cycle negative last week, but new high in Cumulative Volume (CV) in NASDAQ Composite last Wednesday and new high in Daily MAAD last Friday make flirting with Minor Cycle negative look suspicious.
  • Put another way, trend bias still tips in favor of bulls, lacking any serious negative divergences, with proximity to new highs making it somewhat easier for bulls to prove their point than for bears to prove theirs.
  • To look toward more negative market tone, we would first need to see Daily MAAD begin to fail on upside relative to higher pricing. But such a divergence has yet to surface. If anything, for over a year Daily MAAD has quickly erased any suspicions it might be behind price curve and has even led index pricing to new highs on several occasions.
  • Put another way, when MAAD does begin to fail on the upside, its warnings should not be taken lightly since last two times indicator demonstrated significant divergences on Major Cycle were prior to highs in 2000 and again in 2007. On Intermediate Cycle there was negative divergence just before May 2011 Intermediate Cycle correction and worst pull back of bull market since March 2009.
  • Given fact Daily MAAD has yet to put in place any sort of negative divergence to suggest Smart Money has shifted from strategy of buying on weakness to selling on strength, any traders hoping to get in early on short side just might get more than they bargained for. In other words, lacking a current negative divergence, Smart Money has yet to signal it has begun to exit this market.

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