The Stock Market Ebbs and Flows

Last week we mentioned that we were watching the McClellan Oscillator (for the NASDAQ) as it progressed towards an important level of -100.  Today, after the market's recent action, this indicator is now at -139.42, which you can see in the chart below.  What does this mean for the stock market?


The market ebbs and flows, and these oscillators measure those changes in the tides.  There are two observations here that need to be shared.  One is only a short-term observation, meaning in early February the oscillators were very overbought and needed to rest.  They have had two selling sprees, and the McClellan Oscillator has moved down into that oversold territory that "usually" means a rally is imminent.  But today's extreme oversold condition is even better, meaning that the rubber band is wound very tight so any recoil rally should occur soon.  That is the first less important observation.

The second observation is the high level of overbought condition that was reached in late January/early February, which you can see in the chart below.  Traditionally, when the market has this much power, to be able to push the market into this degree of overbought condition, it is usually a very strong sign that the bull market is just on its first legs and has plenty more where that came from.


This is exactly what our Monetary and Valuation Composites are also saying, of course.  So don't get too impatient if this bull market does not generate huge gains in the next few months.  It is all part of the process.

On another note, our Psychology Composite has once again crept into P5 territory.  However, these forays into P5 are not something to overwhelm long-term investors.  In bull markets, you almost always see that any crippling blows to the bullish action only comes after Monetary also moves to a negative rating.  In some ways, Monetary is an iteration of Psychology, since it is when the Federal Reserve gets so optimistic that they start to remove the monetary liquidity.  So when we have the condition we have today - Monetary at M1, you know the Fed has the "pedal to the medal," meaning they are pumping liquidity into the system even faster than this hungry bull can digest it.

Don Hays

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