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McClellan Oscillator Shows Panicky Sentiment March 6, 2007
One of the more popular breadth indicators is the McClellan Oscillator. The Oscillator compares a shorter-term moving average of daily advance/decline figures to a longer-term one, essentially providing a look at the momentum of the underlying breadth of the market.
We show the Oscillator on all of our sector breadth charts, but the most common use is the one for the entire NYSE. Yesterday, the Oscillator closed at -313, which is only the fifth time in history it has exceeded -300. Each of the others coincided with either a major market low or at least a bounce prior to a low (9/19/01, 7/23/02, 5/10/04 and 3/23/05).
Because the Oscillator is based on advance/decline figures, however, it's subject to skew based on how many issues are trading on the NYSE. For that reason, the only way to compare current readings to ones from more than 10 years ago or so is to use a ratio-adjusted Oscillator which adjusts the reading for the number of issues traded on the exchange.
When we do that, we see that the current reading of -94 is still historically rare, even looking back more than 60 years.
Since the middle of 1980, there have been 24 other days which had a reading of -90 or more, and two weeks after those occurrences the S&P 500 was positive 21 times, an 88% success rate. The average return was +3.6% with an average maximum gain during those two weeks of +5.7%, compared to an average maximum loss of -1.8%. Those stats don't include the only real failure - an occurrence on 10/16/87, which immediately preceded the crash of Black Monday.
Why did I use the middle of 1980 as a starting point? Well, because prior to that it didn't work. For some reason, an Oscillator reading of -90 or worse was a horrible buy signal from 1940 - early 1980, leading to a rebound only 38% of the time. I believe in weighting recent history more than ancient history when it comes to these types of stats, which is the only reason I'm mentioning the Oscillator's record in the first place. But it's important to note that it wasn't always the raging short-term buy signal it has been lately. Home | Commentary | Indicators | Models | Sectors | COT | Subscribe | About Us
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