While there are many factors to consider when assessing a potential market top, a couple of timely indicators we consistently track, the McClellan Oscillator and the McClellan Summation Index (NYSE:MSI), are giving us reason to pause and re-strategize.
The McClellan Oscillator is a short-term overbought/oversold indicator while the McClellan Summation Index is an overall market breadth indicator. As a bull market begins to wane, market breadth will begin to narrow as fewer and fewer stocks lead the market higher. According to the developers, Sherman and Marian McClellan:
“Historically, major market bottoms occur after the [Summation] index falls below -1000. Readings above +1600 often indicate a major top is near. Top and bottom signals carry more significance if the index is also diverging from the associated market average.”
Though the McClellan Summation Index fell short of a 1600 “major top” reading by 100 basis points in September, a 1500 level still falls well in-line with the “mini-bull” thesis we have held since the March lows. The divergence between the NYSE Composite and the MSI also warrants serious consideration in that, as the McClellans point out, “Top and bottom signals carry more significance if the index is also diverging from the associated market average.”
Short term, we need to point out that the McClellan Oscillator is extremely oversold but there is certainly room for it to fall farther. It does, however, point to an imminent bounce of some kind – one, in which, we would recommend trimming all but your strongest remaining longs.
Disclosure: No positions
Disclosure: No Positions