Newsletter
May 6, 2006
Belief Always Precedes Action
Market & Sector Review
The McClellan Summation Index
Largest Changes This Week
This Week's Economic Reports
Belief Always Precedes Action
By: Vic Johnson (asamanthinketh.net)
"The will to do springs from the knowledge that we can do." – As A Man Thinketh
What James Allen means here is that we won't attempt something unless we have the belief we can accomplish it. He says as much in his book Above Life's Turmoil where he writes, "Belief always precedes action."
Have you ever had a goal that you just couldn't get started on - or you got started on it but you couldn't maintain consistent action towards the goal?
About seven years ago I was living in some very trying times and struggling for some big goals that I'd set for myself. But I just couldn't seem to stay focused and as time passed by and I'd missed a goal, I'd get more frustrated and start over because that's what I thought I was supposed to do. I repeated this cycle several times and I became a basket case of emotion because I couldn't get anywhere.
Wayne Dyer, writing in You'll See It When You Believe It, says, "Your behavior is based upon your feelings, which are based on your thoughts. So the thing to work on is not to change your behavior, but those things inside of your consciousness that we call thoughts. Once your thoughts reflect what you genuinely want to be, the appropriate emotions and the consequent behavior will flow automatically. Believe it, and you will see it!"
As always, it's our thoughts that are in control and we won't have the "will to do" until we have the "belief to do." I've had a lot of success in this area using positive visualization and affirmations. In fact, for one extended period of time I told myself several hundred times a day while thinking about a particular goal, "I can do this and I know I can!" It took me a while, but eventually I had enough belief to go for the goal and achieve it. Even now when confronted with a challenging situation I'm likely to hear myself saying, "I can do this and I know I can!"
How powerful are your thoughts of belief? Dr. Maxwell Maltz said, "Within you right now is the power to do things you never dreamed possible. This power becomes available to you just as soon as you can change your beliefs."
Market & Sector Review
The McClellan Summation Index
In my career, I have witnessed too many traders accepting indicator's, then applying them without knowing and understanding how that particular indicator is constructed. If you do not understand how an indicator is constructed, how can you understand what it is attempting to say? You can not! If on the other hand you do understand how an indicator is calculated it opens new doors to the interpretation of that indicator under differing market conditions. A little thought can go a long way. This week let's take a look at the McClellan oscillator and summation index and what it could be telling us over the long term as well as the near term. If you are not aware of just how the McClellan Oscillator and Summation index are constructed, and before you go on with this newsletter, please take a moment to review: McClellan Financial
Mathematician James Miekka developed a new formula for calculating the daily Summation Index that prevents drift and forces it to maintain a consistent relationship with the Zero Line. Rather than adding the current McClellan Oscillator value to the prior day's Summation Index (the traditional method), the Miekka formula derives the Summation value directly from the daily 5% and 10% index readings. This not only stabilizes the Summation Index, it also allows you to calculate the Summation Index for any day without knowing what the prior day's reading was. Differences in MCO readings are often caused by rounding and variances in advance-decline data amongst data vendors. For instance my data source contains about 2,800 NYSE issues versus the NYSE count of about 3,200. Check with your service for their exact calculation and the data utilized. Although the actual numbers may differ between services the shape and direction of the index will be the same; the important consideration.
The Prudent Trader utilizes the Miekka calculations, but has one unique twist, when changes are made to sectors and indices (additions and/or deletions) the Prudent Trader program recalculates from the beginning of the database. Therefore the McClellan oscillator and summation index will look as if the new additions to the sector and/or index have always been there and those that have been deleted were never there. I am quite honestly not as yet sure if this method has benefits, however I have always viewed being a little different as a plus, time will tell.
As Prudent Trader members you also have access the McClellan oscillator and summation index calculated for 31 sectors and 11 market indices utilizing only the stocks contained within said sector or index. This gives you an excellent means to determine money flow into or out of a particular sector as opposed to the overall market. Take some time and utilize these charts they may just make you a few bucks.
The McClellan Oscillator is an intermediate-term indicator, but it can also be used for short-term timing when it bottoms in oversold territory (-100). Conventional interpretation suggests when the oscillator moves below the zero Line a sell signal is generated. Conversely a buy signal results when it moves above zero; these are general guide lines not hard rules guaranteed to result in profitable trading.
The Summation Index; a longer-term indicator, oscillates in relation to a zero Line. The normal range of movement is between Zero and +2000 (for broad based indices such as the NYSE). Movement below the zero Line is considered bearish, while movement above +2000 is considered bullish. Conventional interpretation simply looks at the direction of Summation Index, up or down, as an indication of whether money is moving into or out of the market. When the Summation Index moves below the zero line (it is very close at this point) it is an extremely negative sign for the market and indicates that a long-term down trend is in progress and is likely to become more severe.
Hopefully you now truly understand the construction and conventional interpretation of the McClellan indicators (If you are still unsure review the above link again). Now let's take a look at the McClellan oscillator and summation index as it is applied to some of the major indices and see if we can come to an unconventional yet possible scenario for the market.
Depending upon your chosen index notice how the summation index is showing money flowing out of the market (or sector) to varying degrees since December. Most traders, me included, have been looking at the divergence between price and the summation index, and wondering why price has not succumbed to the internal deterioration this and other indicators are showing. Sometimes, I think we as market technicians have a tendency to ignore the most important indicator of all; price. Thanks to the many blogs I visit and read it came to my attention that this was indeed an interesting phenomenon; internal deterioration yet price holding very well. What could this dichotomy be suggesting?
If you accept the fact that money has been leaving the stock market; it begs the question where did the money go? Perhaps into alternative investments but what if this money is sitting idle, in cash (money market funds), anticipating the long over due correction or resumption of the secular bear market. Remember how in previous newsletters I spoke of an inordinately large amount of bears while prices remained at or very close to highs? This is, in all probably, the money exiting and in all probability represents fear, the fear of losing. Take the money and run! Could this raising of cash represent "the smart money" leaving before the rest of us? While this is certainly a distinct possibility and one that I have personally entertained, let me introduce a possible alternate scenario utilizing the same data.
The most widely quoted index "The Dow Jones Industrials" is within 173 points, less than 1.5% from making a new all-time high; totally eradicating the bear market of 2000 thru 2002. Meanwhile other widely followed and much broader based indices such as the S&P 500, the NASDAQ Composite and NASDAQ-100 are not even close to that accomplishment. However, should the Dow make a new all time high it will create headlines in all the print media, national news programs, and every local 6 o'clock and 11 p.m. news program in the country if not the world.
Enter another fear; the fear of missing the next big up move in the market. Will a simple event such as this cause the sidelined money to re-enter the market spiking it higher? While of course no one knows for sure, I believe it's a distinct possibility. The question we all have to ask ourselves; is should this scenario play out what should we do? That will greatly depend upon your time frame, trading style, and objective. If you choose to play this scenario should it unfold; stock selection will be of utmost importance, as I would expect the internal deterioration to continue. In my humble opinion this could be the perfect setup; the perfect storm if you will, turning just about everyone bullish, that will finally put in the 4 ½ year cycle top.
Regardless of which scenario unfolds: the unconventional one mentioned above, or the conventional one which is expecting a bearish turn; the important point of this newsletter is simple; if you know and understand an indicators construction, new doors open and different interpretations become possible and even plausible. Be wary of indicators that you do not really understand.
Largest Changes This Week
This Week's Economic Reports
Have A Great Week!
Bill
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.
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