Tuesday, June 01, 2004

One of the more common questions I've received today revolves around this article: http://www.safehaven.com/showarticle.cfm?id=1597 I don't know the site or the writer, but about halfway down the page he writes about the McClellan Oscillator.  There are two issues with his statements: 1.  He's mistaken - overbought McClellan Oscillator readings normally precede HIGHER prices, not tops and certainly not crashes.  This is even more true for extremely overbought readings.  Oscillator readings of 200 or above since 1940 lead to a higher market 91% of the time after one year, with an avg return of 16%.  2.  He doesn't take into account the increasing number of issues being traded.  The Oscillator is affected by the absolute number of stocks - it was basically impossible to get today's readings 50 years ago, but does that mean markets 50 years ago didn't get as overbought as they are now?  Of course not.  Adjusting the Oscillator for the number of isses traded makes the recent reading the 244th-most overbought since the 1940's. His money supply comments may or may not hold water, but his discussion of the McClellan Oscillator is way off the mark. 2:52:33 PM