FINANCIALS LEAD MARKET IN IMPRESSIVE DAILY BOUNCE -- MCCLELLAN OSCILLATOR IS IN NEGATIVE TERRITORY BUT OVERSOLD -- MCCLELLAN SUMMATION INDEX NEEDS POSITIVE OSCILLATOR TO START RISING -- BASE METALS ARE COMMODITY LAGGARDS
RATIO-ADJUSTED VERSION CHANGES NUMBERS... I recently showed a chart of the NYSE McClellan Summation Index (NYSI). One of our readers asked for an explanation of the McClellan Oscillator which is actually the basis for the NYSI. In essense, the McClellan Oscillator is the difference between the 39- and 19-day exponential moving averages of net advancing stocks on a daily basis. As such, it a short-term momentum oscillator of the NYSE advance-decline line. The reason our numbers may different slightly from others is that we use a "ratio-adjusted" version of both McClellan indicators. In other words, the net number of advancing stocks is adjusted to take into account the total of numbe of issues being traded. That may change the numbers a little, but not their trend.
Chart 1
HOW TO READ THE MCCLELLAN OSCILLATOR... Chart 1 plots the McOscillator over the last year. There are two ways to use it. One is to look for short-term overbought and oversold levels. The chart shows, for example, that moves over +60 have acted as overbought readings that have coincided with recent downturns. By contrast, readings below -60 have produced oversold bounces since last August. As is the case with any oscillator, divergences often warn of market turns (see arrows). Short-term buy and sell signals are given when the oscillator crosses the zero line. That's usually a requirement for a rally to materialize. The three vertical lines show that the last three bounces in August, November, and January coincided with an oscillator crossing over the zero line. At the moment, the McClellan Oscillator is well below its zero line and no positive divergence is visible. It is, however, in oversold territory.
Chart 2
SUMMATION INDEX A LONGER-RANGE VERSION OF MCOSCILLATOR... I mentioned that the McCellan Oscillator was the basis for the Summation Index. That's because the Summation Index is just a running cumulative total of the daily McOcillator values. That means that the Summation Index falls when the McOscillator is in negative territory (like now). And the Summation Index can't rise unless the Oscillator is above its zero line. While the Oscillator is more of a short-term timing tool, the Summation Index tells us more about the market's long-term trend. Chart 2 plots the Summation Index (black line) versus the NYSE Composite Index (green line) over the last four years. The NYSI fell below its zero line at least four times prior to 2007. In each instance, moves back over the zero line resumed the market's climb (see up arrows). At the moment, the NYSI is stuck below the zero line and a falling down trendline. For it to attempt another run at its zero line, the McClellan Oscillator needs to turn positive and stay positive for awhile.
BASE METALS ARE COMMODITY LAGGARDS... One of our readers asked for an update on the industrial metals group. There's good and bad news. The good news is that base metals have been rallying of late. The bad news is that they're the weakest commodity group. Chart 3 shows three of the PowerShares commodity ETFs since the start of 2007. The black line is the CRB Index for comparison purposes. The agricultural ETF (DBA) has been the strongest commodity group over the last year. The DBA includes corn, wheat, soybeans, and sugar. In second place is the DB Commodity Tracking Fund (DBC) which includes crude and heating oil, gold, aluminum, corn and wheat. The weakest has been the DB Base Metals ETF (green line). The DBB includes aluminum, copper, and zinc. Chart 5 shows the performance of the three PowerShares commodity funds over the last year relative to the CRB Index (flat line). Agriculturals have slipped a bit, but are still commodity leaders. The Commodity Tracking Fund continues to be pulled higher by energy and precious metals. By stark contrast, the industrial metals are weak laggards. Given the fact that industrial metals are the most sensitive to the global economy, that doesn't look like a good commodity choice right now.
Chart 3
Chart 4
FED ACTION INSPIRES MARKET BOUNCE... The latest Fed move to add more liquidity to credit markets caught the market's attention today. In a coordinated effort with foreign central bankers, the Fed announced a plan to lend up to $200 billion in exchange for mortgage-backed securities. Foreign bankers will add additional funds to their own systems. Stocks responded positively to the news, especially financial shares which led the rally. Most stock groups achieved nice gains. The market's internals were positive as well, with big board advancers leading decliners by a four-to-one margin and on expanding volume. That's the good news. The bad news is that the market's major trend is still down. And it's going to have to show a lot more upside follow-through to turn that trend around. Bond prices fell as stocks advanced. The dollar rallied against the Japanese yen (preventing a major upside breakout in that currency). Even with a bouncing dollar, commodity markets continued their rally. So far, no important trend changes have taken place in any of the financial markets. Chart 5 shows the Financial SPDR gaining well over 5% today and it did so on rising volume. That's the first sign of financial leadership as shown by its relative strength line (below chart). Chart 5 shows, however, that the trend of the XLF is still down. Today was certainly an impressive day. However, we're going to have to see a lot more of those to pull the market out of its current bear trend. Chart 6 shows the S&P 500 SPDR (SPY) gaining 3% today on rising volume. The fact that it held above its January low is encouraging as well. To really improve its outlook, however, the SPY needs to clear its 50-day moving average and its recent highs around 140.
Chart 5
Chart 6
