The Market Is Not Your Friend

The last time we saw the McClellan Oscillator at an extreme was in the first week of the new year. Back then, for both the NYSE and Nasdaq, it reflected a very overbought market - so much so that it was a decade high (see long term charts in previous link). We now know that the signal it provided in early January was correct as the S&P 500 index quickly reversed and fell from 940.

Now the McClellan Oscillator has swung to the other extreme and is plumbing depths rarely seen. This indicator, is of course, a measure of internal market health. It is a measure that uses advancing and declining issues in a market to find overbought and oversold oscillations.

Here’s a chart of the McClellan Oscillator (Ratio Adjusted) for the NYSE:

Since there is so much non-common stock securities trading on the NYSE these days, I always look at the Nasdaq data to make sure that they aren’t distorting the picture:

According to this indicator, we are close to a ‘wash out’ scenario in the market. And it couldn’t come at a better time for the bulls because the market is sitting right now at support. The McClellan Oscillator’s extreme low level may help the market to hang on by its very fingernails by buttressing it exactly when it needs the support most.

We are starting to see some shifts in sentiment that reflect the sort of pessimism that usually accompany market bottoms. While the Dow Jones is below the November lows, I’m not convinced because it is not capitalization weighted and it represents a very small sample size of 30 companies. I’m giving much more weight to the capitalization weighted S&P 500 index which has yet to convincingly break support.

Another possible scenario is for the market to pierce the November lows, trapping new bears and crushing them as it bounces up. Always remember that the market is no one’s friend, and it doesn’t owe you anything. In fact, more often than not, it is there to distribute the most amount of financial pain, to the most number of participants.

Comments

[anarchist:]

oooh so correct, the market may go up or it may go down. I hate it when we have contributors who have no financial credentials other than "I played the market a dozen years and in my spare time put mimes in boxes"-pleeeease!

Feb 24 05:07 PM

[Mad Hedge F...:]

The Senate Banking Committee holds hearings while Rome burns. The S&P Case-Shiller Home Price Index showed a Q4 fall of -18.2%, the sharpest decline in its 21 year history. Prices in San Francisco fell by 31.2%. We got within 100 points of a 6,000 handle on the Dow this morning, and a print there would have sparked a global stampede to the restroom. But Bernanke managed to assuage fears today, prompting a 234 point rally in the Dow. All ears are on Obama tonight.

Feb 24 05:09 PM

[ROLEXDAYTONA:]

Market is my best friend, at least he never lies, there is nothing more real in finance than the market price.

Feb 24 05:36 PM

[damienhaas:]

If you are so good, you should be a millionaire now and stop contributing nonsense....

Feb 24 06:36 PM

[Jim Hawthorne:]

Wait a minute, here! You say, 'The McClellan Oscillator’s extreme low level may help the market to hang on by its very fingernails by buttressing it exactly when it needs the support most'.

Funny, I was operating under the misguided assumption that Market action drives the (very valuable) McClellan Oscillator, and not the other way around.

There are a bevy of indicators out there of which this Oscillator is but one. We may very well be at a capitulation point from which we can begin to build a base, and possibly begin a recovery. Price and time, driven by Market Fundamentals will decide that.

In the meantime, caution, conservatism and prudence dictate that we be very careful, and not become fixated on any single indicator!

Feb 24 06:52 PM

[the ilster:]

All this technical analysis is great in the short short term however the fundamentals look horrible going forward. I am looking to get short again on this rally somewhere. It wont hold

Feb 24 08:06 PM

[Duude:]

I'm not sure we're at any capitulation level as the volume and frantic type of trading that is typical of capitulation isn't here, but I do believe we're oversold and ready for a swing back the other way. I expect a run up to somewhere in the 7900 area probably as soon as a week followed by a reversal over a few weeks back into the 7000 area. At least that's my opinion for whatever little that's worth.

Feb 24 08:07 PM

[mastic trac...:]

indeed mr. hawthorne, the indicator would have printed the nov. lows after the fact. todays action may be a mere head fake that mssr. geithner may prove correct when he speaks again. i am cautious here like ilster, this is not convincing enough with all of the poor economics. the market discounting mechanism has to look too far out to find a catalyst for a sustainable rally.

Feb 24 09:12 PM

[kelm:]

I hate to ruin your party but we have seen market sentiment at levels that should indicate a bottom multiple times during this debacle and it has not in fact meant much. Technical indicators can work well during normal market conditions. These are far from normal. Interesting indicators but use at your own peril.

Feb 25 10:51 AM

[henarl:]

The average American doesn't have ANY "friends" on Wall St. or in Washington DC. Your only "friends" are your family and people you know personally.

Feb 25 12:36 PM

[ChipSeal:]

"The Senate Banking Committee holds hearings while Rome burns."

Better that than actually doing something! In fact, I would feel more secure if the banking committee went on an extended junket somewhere. politicians can only do harm then the "help".

Feb 25 01:13 PM

[Paul_L:]

Keep up the good work, Babak! Thank you. Paul

Feb 26 08:23 AM