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.
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