It is the seminal events in the financial markets that provide fodder for discussion in the history books. That which followed the stock market peak in September 1929 was epic in proportions. Financial disaster, the Great Depression, and then World War II all made their appearance. The Crash of 1987 shook the financial world. Two decades later the bear market of 2008/2009 wiped out trillions in assets. Some would argue the economies of the world have yet to fully recover from that downturn, despite equity price recovery over the past four years.

There have been other watershed moments logged onto the financial calendar. In September 1981 interest rates reached historic highs. At that point it was possible to buy a 30-year Treasury Bond yielding upwards of 15%. Many of those issues matured within the past several years. Not bad for government work! And then there was the precious metals market that made an historic low in the spring of 2001 with gold and silver becoming the best performers of the new decade.

Market Overview – What We Know:

• Strong gains were registered by major indexes last week. S&P 500, Dow 30, and Value Line index rallied to new short to intermediate highs with VAY to new all-time closing high. NASDAQ Composite gained, but was weakest of four majors.
• All cycles, including Minor, Intermediate, and Major, remain positive.
• Market volume declined 19% compared to previous week, but that was because of truncated 4-day trading week. Otherwise volume would have likely been up a bit.
• To suggest short-term negative, S&P 500 must sell below lower edge of 10-Day Price Channel (1467.39 through Monday). Intermediate Cycle remains positive until S&P declines below lower edge of 10-Week Price Channel (1393.45 through February 1).
• Daily MAAD moved to new short-term high last week, but remains well below more important intermediate resistance made nearly year ago on March 20. Weekly MAAD has moved above resistance created last September, but remains below resistance created in March 2012 and in late April 2011, let alone a long-term downtrend line stretching back to 1999 when indicator peaked in front of highs of early 2000.
• Daily MAAD Ratio was last just above “Neutral” at 1.16 with Weekly MAAD Ratio “Overbought” at 1.63.
• Daily CPFL hit new short-term high last week, but has yet to overcome resistance created last September. Daily CPFL Ratio was moderately “Overbought” at 1.66 while the Weekly Ratio was moderately overheated at 1.91.
• Cumulative Volume (CV) confirmed S&P 500 strength last week to a new intermediate high, but did not confirm gains in S&P 500 Emini, Dow 30, or NASDAQ Composite.

Given the development of stock market pricing over the past few years, and especially since the spring of 2011 when all of our key indicators peaked on the long-term cycle, we are increasingly wondering if the current stock market could be moving toward another one of those historic, and seminal, moments.

Market Overview – What We Think:

• Minor Cycle has begun to look increasingly vulnerable to extent we suspect “spiky” upside nature of index pricing is unsustainable considering fact all cycles from Minor to Major are historically “Overbought.”
• Some have pointed out that Dow Theory confirmation generated on January 18 is very positive development, but it’s important to remember one previous Dow Theory confirmation that was generated on September 3, 1929 at precisely the high (381.71) of the bull market begun several years before. That high was no exceeded for the next 25 years.
• In spite of bullish price “tendencies” since November lows, uptrend initiated in March 2009 is mature and could very likely be much closer to an end point than not. In fact, upside “measured move” targets calculated on a variety of cycle points suggest that on average S&P, Dow 30, NASDAQ, and VAY could be within 10% of ultimate highs in this bull trend.
• So long as pricing and indicators are not in synch on upside as they were from March 2009 until May 2011, lingering long-term doubts will persist, and we will continue to wonder how much longer this market will be able to shake off unfavorable indicator divergences.

In the accompanying chart that includes Monthly Cumulative Volume as applied to both the S&P 500 and the Dow Jones Industrial Average, first note the price patterning in both issues over the past 13 years and since the tech sector bull market high in early 2000. First there was the pullback to the 2002 lows. Then came the rally into the 2007 highs that were followed by the 2008/2009 bear. Next was the March 2009 low and the subsequent bull that is still in effect. But notice something else. Index pricing in both issues bears a striking similarity to a massive Head and Shoulders top with a Left Shoulder, a Head at a slightly higher high, and a developing Right Shoulder.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

Cumulative Volume (CV). CV in both easily kept pace with pricing up and down until the fall of 2007. Thereafter CV moved sharply lower, especially in the S&P. But despite price recovery since March 2009, CV in both the S&P 500 and the Dow 30 has recovered barely 50% of the CV losses incurred during the 2008/2009 bear. That upside failure is a suggestion that while pricing has moved higher, the volume fuel that has been driving the market upward has become weaker and weaker.

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

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

Some would suggest that so long as prices are rising, volume is irrelevant. To a large extent that’s true since investors buy price and not volume. But volume as reflected in CV tends to measure market health. “Is the patient likely to keep breathing?” Put another way, is a river with diminishing water flow likely to sustain river traffic?

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.

Admittedly, given the proximity of index pricing to the highs of October 2007, the margin for error is diminishing. If the S&P 500 and the Dow 30 rally above closing levels of 1565.15 (S&P) and 14164.53 (Dow 30) made on October 9, 2007 with follow through above new all-time highs made on an intraday basis October 11, 2007 at 1576.09 and 14198.10, respectively, then a potential Head and Shoulders top scenario would be tossed to the historical winds. But given the fact that all cycles, short, intermediate, and long-term, are now into “Overbought” territory, just as all of our key indicators have failed to make new highs on the long-term cycle, a miss could put an end to the bull trend begun in March 2009.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD perked to a new short-term high last Friday and to its best level since April 17, 2012. But despite ongoing strength that has propelled the S&P 500 within 4% of its all-time closing high (1565.15) made October 9, 2007, MAAD on both the Daily and Weekly Cycles continues to suggest that since the spring of 2011, the net buying tendencies of Smart Money have changed. While that group has participated in all of the rallies since March 2009, since May 2011 it has bought less on rallies than it has sold on declines.

Although its true Weekly MAAD popped slightly above resistance created in September last week, it remains below resistance highs made in March 2012 and the spring of 2011. There is also a long-term downtrend line stretching back to the mid-1999 MAAD peak that preceded the 2000 highs. Despite slight improvement in the indicator here and there, we continue to view the overall failure of MAAD to confirm index pricing for the better part of the past two years as an ominous sign on the long term.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Daily CPFL rallied above its September resistance high last Friday, but like its sister indicators including MAAD, Momentum, and CV, it is nowhere near overcoming major resistance created back in early 2011. In fact, the indicator would have to double yet again its gains over the past year to even equal the high made the week ending February 25, 2011.

While upward movement in CPFL since the November lows is short-term bullish, the fact that options players are only marginally more optimistic about the market’s longer-term prospects, makes us wonder just how long those prospects will last since the buyers of calls and puts on a Dollar Value basis have only been purchasing slightly more calls than puts for nearly two years.

Conclusion

All trends end whether in women’s fashion, pop music, or the stock market. The bull market that began in March 2009 will prove to be no exception. In fact, except for some upside “runoff” that we may have been experiencing for the past few months and since the November lows, we suspect the bloom was knocked off the rose of the rally in the spring of 2011 when all of our key indicators peaked out. From March 2009 through early May 2011 the S&P 500 gained 106%. From May 2011 to date the S&P has added a little under 10%, or about 1/10th of the other gain.

If our longer-term prognosis is incorrect, and stock market pricing simply continues higher, what will be experienced is a change in risk/reward ratios with the play on all cycles, until proven otherwise, still on the long side. But there is a flip side. As Jeremy Irons, portraying John Tuld in the film, “Margin Call,” says as his firm, an investment bank, hovers on the verge of a financial meltdown in 2008: “Do you know why I get paid the big bucks?… I have to guess what the music might do in a week, a month, a year from now. And standing here tonight, I’m afraid I don’t hear a thing…. Just silence.”

Five years later, we wonder what Mr. Tuld would be hearing.

*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.