McClellan Chart In Focus: When the Flight To Quality Goes Too Far – By Tom McClellan


The stock and T-Bond prices often move in opposite directions, and in August 2019 that movement has reached a pretty extreme degree.  The basis for that statement comes from the indicator in this week’s chart, which comes about through some fairly simple math.

I calculate a 10 trading day rate-of-change (ROC) for both the SP500 Index and for near-month T-Bond futures prices.  Then I find the difference between those two, expressed in percentage points.  It is a very short lookback period, not intended to represent “investment” returns, but rather to capture extreme movements which may have interpretational insights about the two markets.

The current deeply negative reading is officially low, and in small company in terms of past extreme readings.  All of the similarly extreme negative readings have been associated with important lows for the stock market.

Interestingly, the very high readings do not have the same meaning.  Seeing a reading up around 8 percentage points or higher for this spread indicator typically marks the initiation point of a strong new uptrend, as opposed to an overbought top.  This has been one of the most important points I have learned as a stock market analyst: Up and Down do not behave the same in the stock market.  They may in other markets, but for stocks the highest upward momentum is typically seen at the start of an advance, while the highest downward momentum typically marks the bottoms for stock prices. 

One additional point worth noting: The day with the biggest negative reading for this spread indicator is not necessarily the final bottom day for stock prices.  The prior extreme low reading came on Dec. 18, 2018, which was 4 trading days ahead of the lowest closing low for the SP500 on Dec. 24, 2018.  So while we are getting a message that an important price low is forming now, it does not have to be here yet.

Tom McClellan
Editor, The McClellan Market Report


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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.