McClellan Oscillator at Decade All Time Highs

From recent option sentiment readings we have reason to believe that after a fantastic “Santa Claus rally” the market is entering thin air territory - at least in the short term. To that we can add an important technical indicator: the McClellan Oscillator.

If you’re unfamiliar with it, it is simply a measure of underlying breadth and is calculated by taking the difference of advancing and declining issues and then using this net breadth to calculate 39 day and 19 day exponential moving averages. The oscillator is then calculated by subtracting the former by the latter.

You can calculate this oscillator for any market and for each it will display different characteristics but usually, +100 is considered overbought and -100 oversold.

Here is the McClellan Oscillator for the NYSE:

I would take this chart with a grain of salt because over the years, a larger and larger portion of the issues traded on the NYSE is attributed to non-common stock securities like bonds, CEFs, municipal bond funds, preferreds, etc. But even so, the McClellan Oscillator is off the charts!

And this is the McClellan Oscillator for the Nasdaq:

It is important to note that this technical indicator compliments the view that option traders provide because they are both short to medium term in nature. It wouldn’t make much sense using a long term indicator, like say, the Coppock Curve to confirm a short term indicator - or vice versa.

Comments

[Roger Knights:]

Thanks.
(BTW: "compliments" should be "complements")

Jan 07 01:44 PM

[Tom McClellan:]

It has long been a complaint that the supposedly "interest rate sensitive" issues traded on the NYSE are polluting the A-D data, making indicators like the A-D Line or the McClellan Oscillator and Summation Index suspect in their indications.

What we have found, however, is that issues like preferred stocks and bond funds tend to give better indications than the common stocks. Yes, that's right. The "uncommon" issues give better indications about what the overall market will do than the common stocks.

Why would this be? The answer is that those "uncommon" issues are terrible sensitive to liquidity. When liquidity is great, they will do well, and the market as a whole will prosper. When liquidity starts to turn bad, these issues will usually reflect that first, like the canaries formerly used in coal mines to detect bad air before it killed the miners.

The ability of the stock market to pull off a new record all-time high McClellan Oscillator reading is a message that liquidity is in great supply, and is likely to continue flowing into the market for some time to come.

As for the assertion that +/-100 on the Oscillator marks overbought or oversold territory, that used to be true years ago when there were fewer issues traded. And that also applied to the raw McClellan Oscillator, not the ratio-adjusted versions. Rather than focus on a single value, it is better to gauge the current level relative to recent market action. You can see a chart posted every day on our web site at www.mcoscillator.com/D....

We also have a Learning Center with several short articles to help people learn more about our indicators and the work that we do.

Jan 09 03:05 PM