Stock supply -- an issue in Facebook IPO -- is larger market problem

By Robert McCurtain

Market Snapshot:

		Last	Week Chg		Week %Chg
S&P 500 Index		1317.82	+22.60		+1.74%
Dow Jones Industrials		12454.83	+85.44		+.69%
NASDAQ Composite		2837.53	+58.74		+2.11%
Value Line Arithmetic Index		2815.73	+67.84		+2.43%
Minor Cycle (Short-term trend lasting days to a few weeks) Negative / Neutral	Intermediate Cycle (Medium trend lasting weeks to several months) Negative			Major Cycle (Long-term trend lasting several months to years) Positive / Neutral

In the wake of the poorly executed Facebook (FB) IPO on May 18, the blame game has proliferated. Coming to market at $38 a share, one day before the opening it seems company officials at Facebook decided to offer 25% more stock than initially planned. That decision was probably the undoing of the IPO since the extra supply of stock in FB in a market that has been plagued by below average volume and so-so demand for months, didn’t play out well. FB has declined nearly 18% from the offering price and closed last Friday at $31.34.

Naturally those prescient watchdogs at the SEC “in an effort to ensure confidence in public markets” appeared in a timely manner after FB hit the fan. They will have more to say on this matter to the same extent they resolved the Madoff scandal and other market misfortunes in retrospect. We can also expect “shocked” commentaries from politicians like Senator “Foghorn” Claghorn regarding “special interests” on Wall Street, the mechanics of the stock market, and how more regulation will be necessary to avoid future FBs. Stay tuned….

But in the real world the market did what it does best when the price of FB was adjusted to the laws of supply and demand. For those who lost money that truism may be of little solace but, the market proved once again that it takes more buyers than sellers to make prices rise. Lately there has been more supply than demand and its likely FB was at the wrong place at the wrong time. A sale staged back in October when there were more buyers than sellers would probably have fared better.

Market Overview – What We Know:

• Major indexes posted marginal gains in pre-holiday trading last week.
• NYSE trading volume in front of three day holiday sank more than 16% on week.
• Minor Cycle remains negative, but deeply “Oversold” in zone of possible short-term opportunity. Intermediate Cycle remains negative while ranging from “Neutral” to moderately “Oversold. Major Cycle remains fractionally positive.
• Average Price per share finished week at $55.84, up 74 cents Monday through Friday.
• Upper edge of 10-Day Price Channel in S&P 500 (1335.70) must be breached to suggest an end to short-term negative and reversal to Minor Cycle positive. Upper edge of Intermediate Price Channel (1403.55—S&P 500) must be penetrated to indicate an end to Intermediate Cycle negative.
• Weekly MAAD posted marginal strength (12 issues higher and 8 lower) last week, but remains in Intermediate Cycle downtrend. Weekly MAAD Ratio was last at .56 in “Oversold” territory. Price-based intermediate oscillators are not yet “Oversold,” however.
• Weekly CPFL was positive last week by 1.23 to 1, but indicator remains in downtrend on both short and intermediate term trend.
• Cumulative Volume (CV) in both S&P 500 cash index and S&P 500 Emini futures remains above the May 18 lows, but CV in both issues remains noticeably weaker on longer term (see accompanying charts).

On the supply/demand front last week, stock market prices perked marginally higher as we suspected they might, given the “double” dip in “Oversold” readings on the near-term, proximity to 200-Day Line support, and the fact the market was simply ripe for a bounce. But it’s the larger Intermediate Cycle that remains an issue. While the Minor Cycle was last in “Oversold” territory, near-term “Oversold” numbers will be eliminated and will likely be replaced by relatively anemic price data in the sessions just ahead. Such inputs should result in “Neutral” readings on the Minor Cycle and a setup for further selling on the larger intermediate trend. It is the tone of that Intermediate Cycle that will remain the issue for the next several weeks.

Market Overview – What We Think:

• May 18 index price lows (1291.98—S&P 500) could prove to be near-term bottom and launching pad for Minor Cycle rebound. But lackluster performance of market since that low and still negative short-term trend mean index pricing is not out of woods just yet.
• If May 18 low proves to be bottom of Minor Cycle decline within context of Intermediate Cycle negative, any short-term retracement should prove to be short-lived. Strength would probably do little more than erase “Oversold” readings prior to resetting market for another down leg on Intermediate Cycle.
• Near-term bounce in S&P 500 back toward 1400 on outside is possible before larger Intermediate Cycle takes hold and drives bids lower.
• Best guess on how far entire intermediate negative could ultimately carry would be 1283-1213 if “normal” 40% to 60% pullback develops.
• Since majority of our key indicators did not confirm market strength into recent highs, more selling could bring market pricing into line with negative indicator divergences.

After peaking and creating an intermediate high back on April 2 at 1422.38, the bellwether S&P 500 declined over 9% until May 18 (1291.98) when what now looks like a short-term low was put in place. With the larger Intermediate Cycle still in effect and still exerting downward pressure, we look forward to little drama on the short-term trend except that deeply “Oversold” conditions will be erased. At best we could see price improvement back toward 1400 in the S&P 500 at previous support and a level that is coincident with the upper edge of the 10-Week Price Channel (1403.55 through June 1). Strength to, or toward, that level would be good enough to generate “Neutral” or slightly better readings preliminary to a resumption of larger Intermediate Cycle selling.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

On the indicator front, after leading the S&P 500 by nearly two weeks with a plot high on March 15, our Most Actives Advance/Decline Line (MAAD) made a short-term low on May 18. But whereas the S&P was toward 1300 on May 18, on an equivalent basis MAAD was closer to 1260 to suggest that market internals remain weaker than index pricing. On the weekly cycle the upside failure has been a hallmark of MAAD since the 2003 lows. Steadily, the indicator did not keep up with prices after the 2002 bottom, led prices into the 2007 highs by over two months, and only recovered about 50% of its 2007-2009 bear market losses in the rally after March 2009. More importantly, MAAD on the Weekly Cycle failed to better its 2011 highs, despite index strength above equivalent price levels. In a nutshell, Smart Money has participated in rallies over the past several years, but it is the bear moves during which they have demonstrated their greatest enthusiasm.

Options traders have been exhibiting similar reluctance to commit on the longer term.

After failing to surpass the highs made in the winter of 2004, CPFL continually failed to make new highs thereafter. The indicator then peaked nearly three months before the October 2007 top, sank to new all-time lows in March 2009, staged a feeble uptrend thereafter and then failed to better its 2011 plot highs, despite strength in the major indexes to new levels. Simply put, options players, at least since early 2011, have been hedging their bets and neither bull, nor bear, has been able to gain advantage.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

But one of the most revealing indicators we follow, Cumulative Volume (CV) in the S&P 500 and S&P Emini futures contract, continues to highlight the lack of upside volume commitment. After peaking in mid-April 2012, February 2011, and then most recently, CV has not been able to overcome any of those levels despite index strength. This is especially bothersome since in both May 2011 and April 2012, pricing in all of the major indexes was able to reach new highs for the move begun in March 2009. There is also the fact that during the decline which ultimately resulted in the October 2011 lows, CV in both the S&P 500 index and the S&P 500 Emini futures contract sank below primary CV support lows made in July 2010, levels index pricing was able to hold above. There is also the recent upside failure when the major indexes (S&P 500, Dow 30, NASDAQ) made new highs, but CV did not. Those divergences suggest there has been more selling into weakness than buying into strength. And that bias is long-term bearish.

Index	Daily/Weekly/Monthly Stops					Weekly	Monthly
	5/28	5/29	5/30	5/31	6/1	6/1	6/30
S&P 500 Index	BUY 1335.70	BUY 1332.55	BUY 1328.73	BUY 1326.31	BUY 1324.66	BUY 1403.55	SELL 1185.81
Dow Jones Industrials	BUY 12680.44	BUY 12645.43	BUY 12605.85	BUY 12579.48	BUY 12559.06	BUY 13191.68	SELL 11413.64
NASDAQ Composite	BUY 2893.01	BUY 2884.59	BUY 2875.53	BUY 2868.70	BUY 2861.38	BUY 3074.84	SELL 2501.62
Value Line Index	BUY 2859.62	BUY 2849.63	BUY 2839.13	BUY 2831.30	BUY 2826.24	BUY 3058.37	SELL 2551.83

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.

In sum, while we must remain responsive to bullish developments, the grimmer reality reflected in our key indicators continues to suggest a somewhat different resolution and market reality could unfold. As this new Intermediate Cycle negative progresses, we wonder if it could play out similarly to the bear market that followed the recovery after the 2002 lows. In addition, only a bit more selling will turn tentatively positive Major Cycle Momentum negative. The last time that happened was in early 2008 just as equities entered into the second worst decline in stock market history. Prior to that reversal long-term Momentum turned negative in later November 2000 at the inception of a two-year bear market. Currently, and yet again, the bulls have a big point to prove.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD improved on both the Daily and Weekly cycles last week with the former coming off of deeply “Oversold” conditions. Weekly MAAD is also “Oversold,” but since similar readings using weekly index price data have yet to confirm, we suspect the Weekly MAAD Ratio could stay “Oversold” until index price ratios also dip into zones of implied “opportunity.”

We were struck by two developments during the recent short-term decline. First, MAAD moved quickly to the downside after preceding index price action with a top on March 20 before the S&P hit a high on April 2. By the time index pricing began to reverse to the downside MAAD had broken below indicator supports made in late February and early January, but the indicator was outpacing pricing on the downside. That variance suggested that not only was the rally since October suspect, but that Smart Money had begun to accelerate selling. Then, whereas the S&P was quoted toward 1300, Daily MAAD was suggesting a price near 1260 might be more realistic.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

At last plot, Daily CPFL remained locked between its December 19 short to intermediate-term low and the April 9 short to intermediate-term high. More apparent is the ongoing failure of the indicator to get anywhere near the February 2011 resistance high, despite strength in the major indexes back to and above similar levels.

The ongoing failure of options investors to demonstrate enthusiasm for this market reminds us of periods in late 2000 and again prior to the October 2007 highs. Those buyers have continued to hedge their bets, on balance, to the extent neither call buyers nor put buyers have been able to get the upper hand. Given the upside failures and the poor performance of CPFL into significant market highs, we give this current horse race to the puts by a length or two.

Click charts to enlarge

Conclusion

The May 18 intraday low at 1291.98—S&P 500 could prove to be the bottom of the short-term decline which began after the S&P 500 peaked back on April 2 (1422.38). Proof of that potentially positive near-term unfoldment would require strength above the upper edge of the 10-Day Price Channel in the S&P (1335.70 through Monday) and movement by short-term Momentum back to positive.

Once a short-term rebound is initiated, however, we believe any developing strength should prove to be short-lived. When current “Oversold” conditions are eliminated and are replaced by “Neutral” to moderately “Overbought” conditions, we would look for prices in the S&P 500 to stall toward, or this side of, 1400 and the upper edge of a defined 10-Week Price Channel (1403.55—S&P 500). When the short-term price stall begins, we would then anticipate a Minor Cycle reversal back to negative with a subsequent move to new lows and then a resumption of the larger Intermediate Cycle negative.

MAAD Daily data for past 30 days*			CPFL data for past 30 Days
Date	NYSE Adv	NYSE Dec	Date	OEX Call $Volume	OEX Put $Volume
4-16-12	10	10	4-16-12	15429	53058
4-17-12	19	1	4-17-12	28805	25489
4-18-12	3	15	4-18-12	44274	29249
4-19-12	6	14	4-19-12	51074	43091
4-20-12	7	13	4-20-12	37450	44901
4-23-12	1	19	4-23-12	40663	30882
4-24-12	14	6	4-24-12	21555	13137
4-25-12	16	4	4-25-12	29324	26690
4-26-12	13	6	4-26-12	49211	14328
4-27-12	11	9	4-27-12	26767	20901
4-30-12	7	13	4-30-12	25339	18116
5-1-12	14	6	5-1-12	29530	29245
5-2-12	6	14	5-2-12	45791	26125
5-3-12	2	18	5-3-12	23935	27329
5-4-12	2	18	5-4-12	27754	94488
5-7-12	10	9	5-7-12	24441	31446
5-8-12	2	18	5-8-12	39894	62619
5-9-12	8	12	5-9-12	35989	39189
5-10-12	12	8	5-10-12	18938	20728
5-11-12	6	14	5-11-12	44031	48253
5-14-12	4	16	5-14-12	33128	70012
5-15-12	1	19	5-15-12	32188	52530
5-16-12	4	15	5-16-12	19061	73769
5-17-12	1	19	5-17-12	30096	127651
5-18-12	5	14	5-18-12	60082	122184
5-21-12	14	6	5-21-12	48581	30260
5-22-12	8	12	5-22-12	41915	47011
5-23-12	12	7	5-23-12	45272	33238
5-24-12	9	11	5-24-12	27290	21608
5-25-12	8	12	5-25-12	25589	21054

*Note: Unchanged issues are not counted.

MAAD Weekly data for past 30 Weeks**			CPFL data for past 30 Weeks
Date	NYSE Adv	NYSE Dec	Date	OEX Call $Volume	OEX Put $Volume
11-4-11	1	19	11-4-11	178793	256034
11-11-11	11	9	11-11-11	175686	161803
11-18-11	2	18	11-18-11	130876	295014
11-25-11	0	20	11-25-11	77212	275984
12-2-11	18	2	12-2-11	299869	114883
12-9-11	16	3	12-9-11	123094	127775
12-16-11	4	16	12-16-11	71745	356446
12-23-11	19	1	12-23-11	220540	55484
12-30-11	2	18	12-30-11	31982	46924
1-6-12	18	2	1-6-12	108235	66920
1-13-12	19	1	1-13-12	119692	78999
1-20-12	18	2	1-20-12	234612	43131
1-27-12	8	12	1-27-12	86473	113029
2-3-12	17	3	2-3-12	254070	47361
2-10-12	4	16	2-10-12	139340	105129
2-17-12	16	2	2-17-12	216140	46807
2-24-12	8	12	2-24-12	54372	58835
3-2-12	15	5	3-2-12	78724	60272
3-9-12	12	8	3-9-12	154499	66996
3-16-12	17	3	3-16-12	391213	90255
3-23-12	8	12	3-23-12	114104	81344
3-30-12	17	3	3-30-12	123363	85080
4-6-12	3	17	4-6-12	112072	99729
4-13-12	2	18	4-13-12	142511	224456
4-20-12	10	9	4-20-12	61493	132916
4-27-12	12	8	4-27-12	223704	45908
5-4-12	1	18	5-4-12	55698	270290
5-11-12	5	15	5-11-12	89392	179817
5-18-12	1	19	5-18-12	63126	601766
5-25-12	12	8	5-25-12	128890	104849

**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.

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