Imagine one family making the same market claim for almost 50 years... This might sound odd, but it's real. In 1969, Sherman and Marian McClellan developed a unique technical indicator. These folks are well known for being careful, honest analysts.
This 500 Has Nothing to Do With the S&P
Marc Chaikin, founder, Chaikin Analytics
Imagine one family making the same market claim for almost 50 years...
This might sound odd, but it's real. In 1969, Sherman and Marian McClellan developed a unique technical indicator. These folks are well known for being careful, honest analysts.
The indicator measures market participation. Specifically, it quantifies volatile market rebounds – like the one we're seeing now.
The McClellans' work is straightforward. Their indicator uses market "breadth" – the number of advancing versus declining stocks in an index.
Put simply, if this indicator of breadth doesn't cross above a level of +500 during a market rebound... stocks will likely retest recent lows.
The McClellans would be the first to tell you that 500 isn't a "magic" number. And it's not automatically like +501 is "great" and +499 is "bad" for this indicator.
But their work on this goes back for five decades. And I've tested it so that we can see how important this "rule of 500" really is.
And it can tell us how to navigate the current market rebound we're living through...
On July 28, Wall Street veteran Marc Chaikin and trading expert Pete Carmasino will unveil a radical new way to use the Power Gauge... a way to find "hidden" winners in any market condition BEFORE they jump 100%, 200%, or even 300%. See why they're unveiling this strategy now.
AI and chip stocks – the same names that carried the market for more than a year – have taken a beating in recent weeks. Meanwhile, other sectors like healthcare are starting to wake up. One former Goldman Sachs trader has been writing about this for weeks. And according to him, a brand-new system predicted this market rotation – and could help you find major gains as a result. Before midnight tonight, click here for more details.
What Happens If This Indicator Falls Below +500?
To start, I pulled the McClellans' New York Stock Exchange ("NYSE") daily advance/decline data. This data spans from January 1960 all the way up to recent trading sessions.
Folks, this amounted to more than 16,700 sessions worth of data points.
I used the same formulas as those from the McClellan family to analyze this wealth of data. This helped me find a Ratio-Adjusted Summation Index ("RASI") for these sessions.
With that data, it was easy to find the "rule of 500"...
You see, I ran an algorithm to detect every time the RASI dropped to -300 or below. This indicated a major breadth "washout" in the markets.
Put simply, when that happens, it means there are a lot more stocks falling than stocks rising.
A -300 on the RASI indicated a wipeout for any given index of stocks.
I found 180 times where this happened. Then, I looked at what the RASI did afterward.
What I found shed light on the recent rebound we've seen in the markets...
Historically, if the RASI didn't rebound above +500, the markets tanked again 87% of the time. In this case, it means a group of stocks came within 2% of its prior correction low...
On the other hand, if the RASI did jump above +500, the market retested its lows only 27% of the time.
Not only that, but a RASI surge above +500 meant stocks saw an average maximum drawdown of 6%. That compares with an average maximum drawdown of almost 12% if the index didn't clear +500.
I organized this data in the table below...
You may remember some notorious times the RASI didn't clear its +500 mark...
These include the market crash between 1973 and 1974, the great financial crisis of 2008, and the crash in 2022 after the COVID-19 pandemic recovery.
In short, this indicator is a battle-tested way to predict where the markets may head next.
The 'Rule of 500' Offers Clues for the Coming Months
This year's episode is textbook – so far...
The March correction drove the RASI to its "washout point" – a reading of -300. The rebound peaked at a reading of +471 on May 8.
This number is close enough to +500 to be what the McClellans call a "squishy" reading. But since then, the RASI did make a lower high above +350.
Now, we haven't seen the markets retest the lows quite yet. And there are two main ways this could play out...
First, it's possible that the "retest window" isn't over just yet. The markets have six months from recent lows to dip again.
From the correction in late March, that puts us in late September. So there's still a chance the markets could dip again... especially as the weakest stretch of the four-year presidential cycle runs from late summer into the fall of a midterm year.
The second option is that the markets simply don't retest those March lows. That only happens 13% of the time. So this outcome is possible – but unlikely.
Whatever happens, it's safe to say that we're not out of the woods yet. So don't get overly complacent in the markets right now.
Don't Miss My Urgent Briefing Next Week
Amid all this, I believe a small group of investors stand to make the biggest gains of their financial lives...
It's due to a massive rotation of money expected in the markets.
Unfortunately, most investors aren't prepared – and may be blindsided by this move.
As such, I'm going on camera with an urgent message to all my readers on Tuesday, July 28 at 10 a.m. Eastern time...
I'll break down all the details on this impending rotation – and what you can do to prepare yourself.
— According to the Chaikin Power Bar, Small Cap stocks and Large Cap stocks are Bullish. Major indexes are all bullish.
* * * *
Sector Tracker
Sector movement over the last 5 days
Energy
+2.72%
Real Estate
+1.62%
Health Care
+1.24%
Staples
+0.77%
Financial
-0.12%
Discretionary
-0.89%
Industrials
-0.99%
Materials
-1.07%
Communication
-1.27%
Information Technology
-1.55%
Utilities
-1.69%
* * * *
Industry Focus
Innovative Technology
30
50
17
Over the past 6 months, the Innovative Technology subsector (XITK) has underperformed the S&P 500 by 2.17%. However, its Power Bar ratio which measures future potential is Strong, with more Bullish than Bearish stocks. It is currently ranked #12 of 21 subsectors.
Top Stocks
ACMR
ACM Research, Inc.
ANET
Arista Networks, Inc.
EVER
EverQuote, Inc.
* * * *
Top Movers
Gainers
SNDK
+14.27%
WDC
+12.51%
MU
+12.17%
TER
+12.07%
COHR
+11.15%
Losers
DHR
-10.99%
MSCI
-10.14%
TYL
-5.73%
HAL
-5.47%
IT
-4.46%
* * * *
Earnings report
Earnings Surprises
WFRD Weatherford International plc
Q2
$0.61
Missed by $-0.29
COF Capital One Financial Corporation
Q2
$5.81
Beat by $1.12
SYF Synchrony Financial
Q2
$2.59
Beat by $0.46
PEGA Pegasystems Inc.
Q2
$0.35
Missed by $-0.08
HAS Hasbro, Inc.
Q2
$1.28
Beat by $0.15
* * * *
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