April 23, 2023
This article explores and reveals what happens to stock prices when the trend of the McClellan Summation Index (We’ll call it the MSI) turns downward as it did Friday, April 21, 2023:
Most importantly, though, we are particularly interested in subsequent market behavior when this occurs in a Primary Bear Market.
We begin today by displaying the five legs of the 2007-2009 Primary Bear Market annotated by dashed vertical lines where the Summation (MSI) downturns.
In that Primary Bear Market, each leg of the decline began with this specific “Sell Signal” based on the crossing of NYMO (the McClellan Oscillator) below zero. Each crossing below zero produced a downturn in MTI- by definition.
The following image from 2009 is annotated to display where NYMO falls below zero, producing each downturn in MSI. As has been the case in every bear Market over the last 100 years, each matched with those approximate dates when the SPX trend began a steep slide during the 2007-2009 Bear Market.
Ultimately, each downturn in the Summation Index led to a compelling surge in fear at the deep nadir of the trend thus triggered.
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We will examine today what highly significant market action the MSI triggered on April 21, 2023.
But before we do, we’ll quickly skim through a century of downturns in MTIs within Bear Markets so that we each might better appreciate what such “signals” have produced over the last 100 years.
Observe how each downturn in the MSI in a Bear Market triggered an immediate and deep market slide overall. The top pane shows where MSI turns down, annotated with a dashed vertical line. If we follow that dotted line to the lower pane, we see what market action via the Dow Jones Industrial Average followed that signal.
1932:
1937:
1942:
1947:
1952:
1956:
1962:
1966:
1969:
1973:
1977:
2001:
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It is no coincidence that each downturn of SPX price is “signaled” by a downturn in the McClellan Summation Index (“MSI”). The MSI alerts us to a change from net advances leading the market to the opposite condition. When net declines lead prices in a Bear Market, this ultimately leads to the “Summation of all Fears” as each cycle begins, worsens, and finally completes with a “get me out” capitulation.
Following is a brief explanation of the MSI and what it tells a serious student of stock trends:
The McClellan Summation Index (MSI) is a market breadth indicator used in technical analysis to evaluate the overall trend of the stock market. It was developed by Sherman and Marian McClellan in 1969. The index is derived from the McClellan Oscillator, another market breadth indicator that measures the difference between the number of advancing and declining issues on a stock exchange.
The MSI is essentially a cumulative total of the McClellan Oscillator values. It helps to determine the strength of the market trend by analyzing the balance between advancing and declining stocks. When the MSI rises, it indicates more advancing stocks than declining stocks, suggesting that the overall market trend is bullish. Conversely, when the MSI is falling, it means a higher number of declining stocks, implying that the market trend is bearish.
Again, we’ve annotated the following image from 2009 to display where NYMO falls below zero, producing each downturn in MSI. As has been the case in every bear Market over the last 100 years, each matched with those approximate dates when the SPX trend began a steep slide during the 2007-2009 Bear Market.
Below for comparison are the 2022 and 2023 MTI downturns since this Bear Market began:
Comparing where SPX is now to the above five cycles of the 2007-2009 Bear Market, we note that a downturn in the MSI started each significant decline since this Bear Market began in January 2022.
The downturn in the MTI here is of critical significance. One hundred years of stock market history strongly support that markets are just beginning a deep slide toward new lows in May 2023. This signal aligns with our recent observations regarding what history shows follows a deep negative McClellan Oscillator, such as on March 24, 2023. It also concurs with recent comments regarding complacency registered by VIX, currently at levels matching the low at the beginning of this Primary Bear Market in January 2022. Further still concurs with the 100-year record of what follows “Breadth Thrusts” in Bear Markets.
We believe a reasonable inference is that the recent rally is completing or has completed the Wave Two advance, approximately matching the Wave Two Rally top of May 2008. That peak began the Wave 3 decline in that Primary Bear Market.
We will review the overnight futures activity at 9:15 AM on Monday.
We Update Intraday Breadth and NYMO Data Several Times Daily @sevensentinels on Twitter. This data is available to any who may wish to follow us there.
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