THIS WEEK'S DOWNTURN IN MCCLELLAN OSCILLATOR GAVE SHORT-TERM SELL SIGNAL -- HOWEVER, THAT IS STARTING TO WEAKEN THE SUMMATION INDEX WHICH IS A LONGER-RANGE MEASURE OF MARKET BREADTH
MORE ON THE MCCLELLAN INDICATORS ... On Tuesday I showed the McClellan Oscillator (MOC) falling below the zero line for the first time in two months which triggered a short-term sell signal. I explained that the MOC is derived by comparing two exponential moving averages (19 and 39 days) of the net NYSE advances minus declines. [You can think of it as two MACD lines applied to the NYSE Advance-Decline line]. A buy signal is given when the 19-day EMA crosses over the 39-day EMA; a sell signal occurs when the 19-day falls below the 39-ema. [You can see the two EMA lines at the bottom of Chart 1, and the faster (blue) line falling below the slower (red line) this week.] Those trading signals coincide with MOC crossings above and below the zero line. The last upcrossing took place in August and the last downcrossing this week. The MOC also shows short-term divergences. It gave a positive divergence in mid-August and has been showing negative divergence over the last month. The MOC signals are short to intermediate-term in duration. That tells us that the market will remain on the defensive until the MOC reaches oversold territory (near -75) or until it crosses back over zero. The McClellan Summation Index is a longer-range version of the McClellan Oscillator.
Chart 1
MCCLELLAN SUMMATION INDEX ... The NYSE Summation Index (NYSI) is a longer-range version of the MOC. [The Summation Index is the sum of each day's Oscillator values]. The Summation Index (dotted line) continues to rise as long as the MOC is above the zero line. The August bottom in the NYSI coincided with the MOC crossing over zero. This week's drop below zero by the MOC is causing the NYSI to drop. I like to think of the Summation Index as a measure of the long-term momentum of the NYSE AD line. It dropped from May to July as the market was rising and gave an early warning of market weakness. It bottomed in August. I view a move over zero as a necessary ingredient for a bull market to continue. That positive turn took place in late September. The NYSI, however,is well below its spring high and is starting to weaken again. That suggests to me that market breadth is a good deal weaker than the market indexes would have us believe. That would be especially true if the Summation Index were to fall back below zero. [To view Chart 1 go to the Market Summary page, look at the fourth listing under Market Breadth (NYSE Summation Index), and click on the middle box to the left of NYSI. Click on the box to the far left to see the Summation Index by itself. You can do the same with the Nasdaq Summation Index].
TWO DOW CYCLICALS TUMBLE... The Dow Industrials were hit especially hard on Friday. A lot of that was due to big tumbles in two of its cyclical stocks -- Caterpillar and 3M. Chart 3 shows Caterpillar falling 6% (on higher volume) to undercut its 50-day average. CAT appears headed for a retest of its 200-day line. Chart 4 shows 3M tumbling 7% on huge volume. Both relative strength lines are in downtrends. The fact that both stocks are considered be cyclical in nature (or economically-sensitive) suggests that the market is getting more worried about the U.S. economy. That view is supported by the fact that Dow stocks holding up the best were in the defensive consumer staple and healthcare categories.
Chart 2
Chart 3
DEFENSIVE DOW GAINERS ... Charts 5 and 6 show Merck and Altria Group trading higher today and testing overhead resistance barriers. Both relative strength lines are rising as well. While all market sectors ended in the red today, the two that held up the best were consumer staples and healthcare. [Procter & Gamble and Coca Cola also held steady today]. That's where money usually goes when investors are worried. Some of that worried money is also moving into bonds.
Chart 4
Chart 5
FALLING YIELDS BOOST BOND ETFS... On Wednesday, Arthur Hill showed bond ETFs rallying. That trend intensified as stocks weakened later in the week. When bond prices rise, bond yields fall. And that's exactly what's happening. Chart 6 shows the 10-Year T-Note yield tumbling to the lowest level in a month. That's a sure sign that investors are worried about more serious economic slowing and the likelihood of more Fed rate cuts. [That explains why the U.S. Dollar has been dropping so much of late]. Chart 7 shows the 7-10 Year Treasury Bond Fund (IEF) surging on Friday. [Chart 7 is just a mirror image of Chart 6]. As Arthur pointed out at midweek, the recent pullback in bond prices found chart support at the spring highs (green line). That's a positive sign for bonds. The relative strength ratio (bottom of Chart 7) compares bond prices to the S&P 500. The ratio bottomed in mid-July when the market tumbled and fell during September as the market rallied. The ratio is rallying again which means that investors are moving out of stocks and into bonds at the fastest pace in three months.
Chart 6
Chart 7
RISING YEN WEAKENS CARRY TRADE... Earlier in the week I showed the CBOE Volatility (VIX) Index starting to bounce again, which suggested that options traders were turning more defensive. The Japanese yen has also started climbing this week. In fact, the yen was the biggest currency gainer on Friday. I point this out because rallies in the yen (from late June to mid-August) have coincided with pullbacks in global stocks. That's because of the "yen carry trade" where traders sell yen to buy higher-yielding assets elsewhere. A rising yen forces them to unwind that trade and sell some of their assets, which includes stocks.
Chart 8
SMALL CAPS BREAK 200-DAY AVERAGE... A week ago Thursday (October 11) I showed the S&P 600 Small Cap Index failing a test of its summer high at 445, and warned that was an important setback for the entire market. [That same day, large cap stock indexes suffered a downside reversal day on heavy volume]. Since then, small caps have continued to weaken and have pulled large caps down with them. Things took a more serious turn for the worse today when the SML closed below its 200-day moving average (the Russell 2000 did the same). That suggests that the current selling in both small and large caps could get even worse.
Chart 9
S&P 500 SPDRS NEARS TEST OF 50-DAY LINE ... The market suffered a bad technical day on Friday. Prices fell well over 2% today (small caps lost 3%) and on continuing heavy volume (a negative pattern that started over a week ago). Market breadth was negative by a five to one ratio on the big board and the Nasdaq. On Tuesday, I showed the daily MACD lines turning negative for the first time in two months (as well as the McClellan Oscillator). The 14-day RSI line fell below 50 this week which suggests it has further to drop. Both are short-term negatives. The S&P 500 SPDRs in Chart 10 are approaching an important test of two support points. One is the early September peak at 149 (pullbacks should find support at previous peaks). The other is the 50-day moving average which also sits at 149. Whether or not those supports hold will determine if this is just a normal pullback or something more serious.
Chart 10
