Stocks Approach Long-term High of Cyclical Bull Market

| March 30, 2011

The S&P 500 index closed moderately higher again today, moving up to a new high for the reaction from the middle of March and approaching the long-term high of the cyclical bull market from 2009.

With respect to cycle analysis, the alpha phase rally of the current short-term cycle has returned to the beta high (BH) of the previous cycle, suggesting that cycle translation is now in question. The alpha high (AH) will likely occur sometime during the next several sessions, and it will be important to monitor closely the subsequent decline into the beta low (BL).

The S&P 500 continues to track the intermediate-term scenarios that we outlined last week, and both possibilities remain viable as we enter earnings season. However, it is worth noting that our Cyclical Trend Score (CTS) has rebounded only slightly during the recent stock market reaction.

This negative divergence suggests that underlying strength is deteriorating and favors the topping scenario. You can also see this lack of conviction in broad market internals such as the volume summation index. As shown on the following chart, the break below support at the lower boundary of the rising wedge formation in early March was followed by a sharp decline. However, the stock market reaction during the past 2 weeks has been accompanied by only a slight rebound in volume summation.

As we noted last week, stock market behavior during and immediately following the April earnings season should provide a great deal of clarity with respect to long-term direction. A relatively weak response to the forthcoming earnings reports followed by a return to previous short-term lows would suggest the development of a long-term top, while a strong response and subsequent breakout would favor a continuation of the cyclical bull market.

Category: Commentary, Market Update

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