Oversold McClellan Oscillator Points to a Short-term Bounce

Selling pressure dominated Wednesday. Breadth was heavily in favor of
decliners by a 4:1 margin, and volume associated with declining issues
accounted for 84% of total volume. NYSE TICK action was persistently negative,
with our TICKscore indicator closing at -24 and cumulative TICK indicator
settling at -98,000, its lowest reading in three months. About the only
positive thing you can say about Wednesday's session is that selling pressure
is most likely nearing a short-term exhaustion point. Note that the heavily
lopsided breadth stats sent the NYSE McClellan Oscillator deep into oversold
territory (below -200), usually a sign that the market is at or near a short-
term bottom. The last 30 instances in which the McClellan initially closed
below the -200 level are listed in the table below, along with the S&P's
performance three trading days later. Note that in 22 out of 30 cases, or 73%
of the time, the S&P closed higher three sessions later. That's significantly
better than the 54% at-any-time odds of a higher S&P three days later...

NYSE McClellan Oscillator closes below -200
06/11/08 -245... S&P ??? three days later
03/17/08 -253... S&P +4.1% three days later
03/07/08 -208... S&P +1.2% three days later
11/19/07 -254... S&P +0.5% three days later
11/09/07 -234... S&P +1.2% three days later
11/07/07 -213... S&P -2.5% three days later (*)
08/15/07 -257... S&P +2.8% three days later
08/03/07 -213... S&P +4.5% three days later
07/24/07 -228... S&P -3.4% three days later (*)
06/12/07 -253... S&P +2.7% three days later
06/07/07 -258... S&P +0.2% three days later
03/02/07 -228... S&P +0.3% three days later
05/17/06 -223... S&P -0.6% three days later
04/11/06 -200... S&P -0.1% three days later
10/12/05 -239... S&P +1.1% three days later
03/16/05 -229... S&P -0.4% three days later
01/05/05 -212... S&P +0.5% three days later
05/07/04 -275... S&P -0.1% three days later
04/29/04 -216... S&P +0.5% three days later
04/14/04 -249... S&P +0.7% three days later
02/04/04 -206... S&P +1.2% three days later
07/17/03 -239... S&P +0.6% three days later
06/23/03 -227... S&P +0.4% three days later
01/27/03 -237... S&P -0.3% three days later
10/09/02 -248... S&P +8.3% three days later
09/24/02 -212... S&P +1.0% three days later
07/22/02 -258... S&P +2.3% three days later
03/22/01 -230... S&P +5.8% three days later
08/10/99 -228... S&P +3.6% three days later
08/28/98 -216... S&P -3.6% three days later (*)
08/04/98 -262... S&P +1.6% three days later

This jibes with the overbought volatility setup discussed in Tuesday's column,
which suggests we'll see a contraction in volatility. It may not start
immediately, but selling pressure is most likely nearing a short-term
exhaustion point. Note that the VXO is coming off a 30%+ week, and is
currently trading above last week's settlement. There have been 44 weeks since
1987 in which the VXO gained 25% or more. Only 20% of the time did the VXO
manage another higher weekly close the following week.

The extent of any bounce over the next few sessions will be telling given the
extreme oversold conditions. With the McClellan falling below -200 today, the
S&P should at least be able to hold its own heading Monday. If it can't and
the S&P is trading down 0.5% or more, it would add to the already negative
intermediate-term implications. Looking back at times when the short-term
oversold McClellan signal outlined in the table above led to a loss of 0.5% or
more, the market typically remained under pressure over the next week. Every
occurrence since 1970 is noted in the table below...

NYSE McClellan <-200, S&P Down 0.5% Three Days Later
11/12/07... S&P500 -0.4% one week later
07/27/07... S&P500 -1.8% one week later
05/22/06... S&P500 -0.2% one week later
09/02/98... S&P500 -1.0% one week later
07/31/98... S&P500 -2.8% one week later
10/21/87... S&P500 -9.7% one week later
10/25/78... S&P500 -0.5% one week later

Categories : Archived EOD Commentary, End-of-Day Commentary

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