Chart In Focus, by Tom McClellan
McClellan Oscillator for High Yield Bond A-D Data
September 14, 2016
The regular McClellan Oscillator is based on Advance-Decline (A-D) data
for the NYSE. But the same calculation can be done on other sets of
A-D data. This week’s chart looks at an interesting example of that,
with a big message for the current moment.
The Financial Industry Regulatory Authority (FINRA) kindly
publishes data on Advances and Declines
for corporate bonds, breaking out totals for Investment Grade, High
Yield, and Convertible. Each category is interesting in its own right,
but I find the High Yield numbers the most interesting, perhaps because
of the strong correlation that such bonds have to the movements of the
stock market.
This particular version of the McClellan Oscillator for High Yield Bonds is
calculated the same way
as for the NYSE A-D data. But because the number of issues traded are
different for each market, the raw scaling is therefore necessarily
going to be different.
Once we get past that notion of scaling, and just focus on the chart
itself, we can pretty easily see where “high” and “low” readings are.
I
drew a horizontal line at the arbitrarily chosen level of -75 to help
focus the eye on the situation we see right now. Very low readings
below that line tend to reliably be associated with meaningful bottoms
for the SP500. I should caution that the notion of “meaningful” bottoms
does not mean the same thing as “final” bottoms.
But such bottoms are usually followed by meaningful bounces, if not
outright up moves. That is the important message. What we are seeing
with this very low reading is a message that the stock market is at a
meaningful bottom and ought to see a brief pop, at a minimum. What
happens after that is a more difficult question to address.
It is not only the McClellan Oscillator for these data which has
merit. A raw Advance-Decline Line (A-D Line) can have value on its own,
when it signals a trend change.
When the High Yield Corporate Bond A-D Line crosses through a long
trendline, it is a pretty darned good signal of a trend change. Some
examples are shown in this second chart.
This is important now because we have just seen such a crossing, this
time below the rising bottoms line that dates back to the Feb. 2016
low. That line has been fairly authoritatively broken, and now this A-D
Line is also threatening to close below its own 5% Trend (AKA 39-day
EMA), an act which would add further confirmation of a trend change.
High yield bonds had come back into fashion in 2016, as the central
banks’ policies of zero or negative interest rate policy has pushed
investors into more risky assets. The pendulum appears to be swinging
back again, although it has swung really far already on the first push,
as evidenced by the extremely negative McClellan Oscillator reading
shown above. That says the initial down leg may have gone too far too
fast all at once.
But the broken uptrend lines says we are seeing a significant trend
change getting started right now. Both messages are worth
acknowledging.
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This
has been posted for Educational Purposes Only. Do your own work and
consult with Professionals before making any investment decisions.
Past performance is not indicative of future results
