Bloomberg News

McClellan Sees Stocks Rising Until February: Technical Analysis

October 20, 2011

Oct. 20 (Bloomberg) -- Investors should start buying stocks because indicators of momentum and breadth suggest the Standard & Poor’s 500 Index’s rally from an October low will last, said Tom McClellan, editor of the McClellan Market Report.

The benchmark for U.S. equities formed an outside day reversal on Oct. 18, when its intraday high and low exceeded those of the previous day. That pattern, along with charts including the McClellan advance-decline summation index, showed the rally that lifted the S&P 500 as much as 15 percent from its 2011 intraday low will extend until February, McClellan said in a telephone interview yesterday.

“The way that the market had an outside day reversal showing strength was very impressive,” said McClellan, who started publishing the newsletter in 1995 with his father Sherman, creator of the McClellan Oscillator. “You can get into a condition where there is just so much money trying to charge through the door to get into the market that you don’t ever get a pullback you’d like to get, to get on board. And I saw a lot of signs that we’re in that condition.”

The S&P 500 jumped 11 percent from Oct. 4 through Oct. 14, the biggest gain over nine days since March 2009, buoyed by optimism over corporate earnings and steps by European leaders to support banks. The benchmark slipped 1.3 percent yesterday on concern about the strength of the economy, an impasse over the European bailout, and disappointing results from Apple Inc.

McClellan, who is based in Lakewood, Washington, said in an Aug. 18 interview that investors should avoid stocks until this month. The S&P 500 has since been stuck in a 158-point trading range, falling to this year’s intraday low of 1,074.77 on Oct. 4.

‘Thrust’ Signal

The rally since then has sent a “Zweig breadth thrust” signal, McClellan said. Named for Martin Zweig, who first identified it, the indicator tracks the number of rising securities divided by the total of advances and declines on the New York Stock Exchange.

The thrust signal is sent when the 10-day moving average of the data rises from below 0.40 to above 0.615 within 10 trading days, McClellan said. From Oct. 3 to Oct. 14, the reading jumped from 0.39 to 0.619, he said.

The McClellan advance-decline summation reading on NYSE- traded securities climbed above 200 on Oct. 12 for the first time since the end of August. It dipped below the threshold on two out of the following four days and surpassed it on the other two days, Bloomberg data show.

“When you see repeated high values, it’s saying that there is sustained pressure of money trying to find its way into the market,” McClellan said. “That tends to be a condition that doesn’t go away very quickly and tends to last for a long time,” he said. “That’s something you do in an uptrend, as opposed to a bear-market snapback rally.”

--Editors: Stephen Kleege, Jeff Sutherland

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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