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Last week, the weekly, as reported by Barrons, NY composite (all issues) AD McClellan Oscillator (MCO) reached its highest level since 1991, closing the week at +97.  The +97 weekly AD MCO nominally topped the +96 weekly NY composite AD MCO posted in late spring of 2003.

So the question: MCO initiation thrust or head fake?  Let's take a look at the weekly NY AD MCO behavior since 1940 to determine if these high weekly AD MCO values are typically the beginning of big price moves.

First, a bird's eye view of the weekly NY composite AD MCO action from 1975 through the present.  First of all, the weekly Friday SPX price close is represented in logarithmic terms, adjusted to compensate for MicroSoft Excel's shortcomings in charting logarithm values. The SPX prices over this time frame are not exact, but the basic price pattern is very close to reality.

Note over the past 34+ years, weekly NY composite AD MCO postings near the +100 range have been followed by strong price advances over the next year or two at a minimum.... good sign for bullish investors... except in early 1976 at the left end of the chart where prices didn't do much following a +112 weekly AD MCO level.

Now a look at the weekly NY composite AD MCO from 1940 through 1975. In the majority of cases, weekly AD MCO values close to the +100 green-dashed line have resulted in sustained price moves.  False initiation thrust signals not resulting in strong price advances occurred in the 1947, 1948. and 1973 (which resulted in a price bump, but within a few weeks, prices were plunging).

Now, to see if there are any clues associated with lofty weekly AD MCO initiation thrusts and the weekly AD McClellan Summation index (McSum). In late December 2008, the weekly NY AD McSum reached its lowest level since early 1975.

Circled in red on the AD McSum blue curve, are the approximate time frames where high levels of the weekly AD MCO took place. Circled in green are the time frames when a high value AD MCO was posted and prices got little if any boost from the high AD MCO posting over next many months.

Note the weekly AD McSum was deeply in negative territory when high AD MCO values were posted and did not result in initiation thrusts. Since the weekly AD McSum was also very negative when high value AD MCO levels did turn out to be initiation thrusts, there is no clear, high probability that the recent weekly AD MCO level will prove to be an initiation thrust for propelling prices much higher.

Past history favors the initiation thrust scenario, but the probability is less than 75%, so no guarantees.

In a collaboration with Tom and Sherm McClellan, we have been able to derive weekly AD data for the NYSE common stocks only using data from late 2001. The Friday-over-Friday closing prices are compared for every common stock traded on the NYSE to determine if the issue advanced or declined, the same methodology used by Barrons. The data base is very small relative to the NY composite weekly AD data, but does provide some useful insights into what NYSE components, common stocks or "uncommon" issues have contributed to the strength of weekly AD indicators.

The weekly common stock only AD MCO reached +95 last week versus a +102 AD MCO value in late spring 2003. Thus the common stocks were nominally stronger coming off the 2003 low than currently, the opposite of what the composite weekly AD MCO states in the 2003-2009 comparison.

We also derive a weekly NY "uncommon" AD MCO, which is merely comprised of the preferred, CEF, derivatives, and a few ADS issues not included in the common stocks, as defined by the NYSE.

In the short history of this weekly AD data, the "uncommon" weekly AD MCO is noticeably higher than its 2003 peak, and nominally exceeded its prior 7-year high posted 1-9-2009.

There are few if any indicators that are perfect, and although probabilities are on the side of the bulls when considering weekly AD MCO initiation thrusts, additional tools need to be considered (of course).

One long term indicator that has a short history (9+ years) is suggesting the bullish case is not rock solid. The data comprising the next chart comes from the weekly OCC retail Buy-To-Open (BTO) data for equity options.

A retail volume BTO Put-Call (PC) ratio is determined, and then divided by it premium BTO PC ratio.  When the indicator is above 1.0, the volume BTO PC ratio is higher than the premium BTO ratio, and vice versa when the indicator is less than one, as it currently is.

Throughout the 2001-2003 bear market, this indicator remained below its demarcation line of 1.0, first exceeding 1.0 on a weekly basis in late March 2003 (the curve is a 4 week MA).  Although last week's value was 0.93, its highest level since late August 2008, the retail premium PC ratios are still exceeding their corresponding volume PC ratios, which in recent history, has not boded well for a sustainable multi-year bull run... however, the history of this data is relatively short, so not all is lost for the bull camp.

I have not had time to post much since the early March 2009 bottom, but I recall hearing/reading several comments that options data analysis was the hook keeping many traders bearish during the formation of that price bottom. Besides understanding options PC ratio extremes diverge like most other indicators at bottoms prices rise robustly out of, one must also strive to find and study clues not every one else is following.

It takes work, but there are many jewels out in the data world very few analysts follow, and are exactly the data sets one should seek out. 

An example of an options indicator (and there are several more) that clearly exhibited an extreme in early March 2009, was the smallest retail trader (1-10 contracts per transaction) weekly premium BTO PC ratio for the week ending 3-6-2009. This indicator spiked into its bullish zone and also provided a lower high.  Although it didn't roll over, providing a buy signal, until the week ending 3-13-2009, it provided an excellent warning flag, along with many other tools, it was time go slow on the bear side.

Currently, the small retail trader BTO premium PC ratio is at its lowest level since early September 2008... not a good time to be loading up on new long positions. The $64K question right now is, has the demarcation line between a bull market and bear market been traversed? If so, we want to shift to the bull parameters for analyzing our indicators, if the demarcation line between a bear and bull market has not been crossed, many tools are suggesting the very robust rally over the past several weeks is perhaps getting long in the tooth... place your bets!


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