Rope A Dope: Historic Contraction/Historic Indecision

Let’s look at what happens to stock prices when the trend of the McClellan Summation Index (MSI) turns down as it did Friday, April 21, 2023.

Importantly, we are most interested in subsequent market behavior when this occurs in a Primary Bear Market.

Signals produced in a Primary Bear Market will not see the same results as those produce in a Primary Bull Market.

Below we display the five legs of the 2007-2009 Primary Bear market defined by dashed vertical lines where the McClellan Summation Index turns down.

In that Primary Bear Market, each leg of the decline began with this kind of a sell signal based on the crossing of the McClellan Oscillator (NYMO) below zero. Each crossing below zero produced a downturn in the McClellan Summation Index--- by definition.

Each time the NYMO fell below zero producing each downturn in the MSI beginning a steep slide during the 2007-2009 bear market.

This has been the case over the last 100 years.

Let’s take a look at the sell signal prior to the infamous 1987 crash.

Below is the bear market from 2000 to 2002.

The message is that each downtrend of the SPX is signaled by a downturn in the McClellan Sumation Index.

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 capitulation…fear as each cycle begins, worsens and finally culminates with a “get me out” climatic give-up.

Conclusion. The McClellan Summation Index is a market breadth indicator used to evaluate the overall trend of the stock market,

The Summation 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 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.

Below are the 2022 and 2023 MSI downturns since this bear market started.

Notice that a downturn in the MSI started each significant decline since this bear market began in January 2022.

The downturn in the MSI here is critical based on the structure of the Wave count, which suggests a Wave 3 is on deck.

It also aligns with our observation regarding what history shows follows a deep negative McClellan Oscillator, such as occurred on March 24, 2023.

A bounce follows prior to a severe downturn, albeit this bounce has lasted somewhat longer.

What do they say---the bigger the top, the bigger the drop.

The current MSI downturn also aligns with the current complacency registered by VIX, now matching levels at the beginning of this bear market in January 2022.

Yesterday I commented that the market reminded me of the price action in the 10 days prior to 9/11.

The market is heavy.

That was 259 months ago.

Maybe something, maybe nothing but on my Square of 9 Wheel, 259 “points to” April 28^th.

14 out of the past 15 sessions in the SPX have seen the index close less than 1% from its previous day’s close.

In this period the index has advance a big 0.30% and the NDX has declined 1.36%.

Monday was the ninth straight day when the RUT’s close is the opposite of the close of the day prior marking historic indecision.

Last Wednesday, April 19, the VIX imploded to its lowest since November 16, 2021, just four trading days before the NDX all-time high.

Low volatility, inertia, and contraction of range almost always precede high volatility.

These periods of contraction are followed by periods of intense expansion of range.

The tension is on the tape, whether we get one final hurrah as FANG reports this week remains to be seen.