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Reply with quote  #1 

To complete the US common stock grouping's current internals status, this thread takes a look at the McClellan Summation Indices (McSum) for the 4000 largest cap US common stocks as defined by the Russell company.  The 4000 US common stocks are divided into four groups of 1000 issues each, described as tiers 1, 2, 3, and 4.  For details of the identities of each tier, reference the "Dissecting the US Commons: Volume & AD Lines" thread.


First the Advance-Decline (AD) McSum for the Tier 1 (largest cap) group of US common stocks defined by the Russell 1000 (RUI) components.  The Tier 1 AD McSum is showing signs of a breakdown, although is still in the +500 range, explaining the minimal price damage endured thus far by the large cap indices.  If the large cap AD McSum continues to decline the door will be opened wider for more serious price declines.  Note the lows of the Tier 1 AD McSum in the summer of 2006 were the lowest recorded over the past three years, and recall those lower lows when examining the three year lows of the other tiers' McSums.



The Tier 2 AD McSum has now declined to +346 (after topping at +819 in November) and is approaching the level where a turn back up will be needed to prevent more serious price damage than has been endured thus far.  Note the Tier 2 AD McSum had its most severe washout in over three years (actually since the 2002 lows) in the summer of 2006, a confirmation the four year cycle lows did come in early.



The Tier 3 AD McSum has (for now) found support around the levels of its October 2006 low and is trying to turn north again.  Note the Tier 3 AD McSum momentum lows were posted in April 2005 unlike the Tier 1 and 2 AD McSums.... perhaps discounting the extended Fed rate hikes and those rate hike impact upon the smallest cap stocks. 


A data point to keep in mind for the lowest cap 2000 stocks, is their AD McSums rarely exceed +500 and will often top out close to small cap index price tops.



The Tier 4 (NanoCap) AD McSum, like its AD line, looks very similar to the NASDAQ AD McSum... providing a list of the prime suspects responsible for the behavior of the NASDAQ breadth related behavior over the years.  As with the Tier 3 AD McSum, the Tier 4 AD McSum held above its August 2004 and April 2005 lows last summer.



The Tier 1 (RUI) traditional UD volume McSum has sliced through its +500 level and is nominally weaker than its AD McSum.  If the Tier 1 UD McSum continues to decline, the vulnerability of price degradation becomes more pronounced.



The Tier 2 traditional UD volume McSum is exhibiting a bit stronger relative strength than its Tier 2 AD McSum which is encouraging for bullish case of this group.  For the bulls, it is important the Tier 2 UD McSum not violate it early October 2006 low.



The Tier 3 UD McSum is quickly approaching its October 2006 low, and is also continuing a pattern of longer term lower highs from its August 2005 high.  This behavior suggests the Tier 3 group of stocks' traditional UD McSum is being affected by several declining issues with relatively high volume.



The Tier 4 (NanoCap) traditional UD volume McSum has been the most resilient of the four tiers during the recent price consolidations.  However, the unweighted NanoCap price index has continued to make new recovery highs while it UD McSum declined.  A hook being formed in the Tier 4 UD McSum, or a renewed move up after its pause?



A look at the $Weighted Up-Down ($UD) volume McSums, first the Tier 1 large caps.  This Tier 1 volume McSum variant remains noticeably stronger than the traditional UD volume Tier 1 McSum, suggesting lower priced, high volume components of RUI have had more trouble over the past few weeks than the higher priced RUI components... a possible explanation of why prices have held up pretty well despite the degradation of the internals.



The Tier 2 $UD volume McSum is exhibiting similar behavior as its larger cap Tier 1 cousin, but must find support at its +500 line in the sand.  As with many internals indicators, the next few trading days will likely clear the air with respect to expectations over the coming weeks.



The Tier 3 $UD volume McSum is exhibiting good relative strength, remaining at levels where price collapses find difficulties in gaining traction.  This indicator is suggesting the Tier 3 higher priced, higher volume components have remained buoyant over the past few weeks.



The Tier 4 (NanoCap) $UD volume McSum remains at lofty levels, but the choppy pattern over the past few weeks results in lower level more often than not.  Despite the anemic AD line of the Tier 4 components, the NanoCap $UD volume McSum illustrates the majority of dollar flows into this group are with the advancing issues.







Posts: 4,899
Reply with quote  #2 
Well, you pretty much summarized the technical expectations quite well, and the lack of moving to new MCSUM highs on many of the tiers continues to work well with the idea that overall liquidity in the markets, as a whole, is certainly not as great as it has been over the last 4 years.

Furthermore, the lack of tiers 1, 2, and 3 not being able to take out the summer MCSUM 2005 highs, along with the Nano's being able to do so, does strongly suggest that "smart money" is not as interested in the small caps as much as they have been in the past, with "dumb money" attempting to "make a killing" by buying those products with very little in the way of real value (and probably using the bottoming of the 4 year cycle as their excuse in doing so). Circumstances such as this is pretty much in line with a price top of at least an intermediate, if not, longer term nature.

However, with much of this same data reflecting the push we usually see after the 4 year cycle bottoms, I would expect at least one more new price high to be seen, with MCSUM bear divergence, before we see a multi month correction come about because of what this same data represents.

Great study and exercise, and thanks again for the effort!


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