Summation Index and Zero

The big table in our Daily Edition shows the values for the McClellan Oscillator and Summation Index as calculated the old fashioned way, i.e. with no adjustment for the changing number of issues.  This same convention is used in the charts on page 3 of our twice monthly newsletter.  For the NYSE and Nasdaq, we use the +1000 level as neutral, since that was the convention introduced by my parents back in 1970, and we did not want to confuse long-time users.

The story behind that +1000 neutral level takes us back to the very earliest days of the McClellan Summation Index.  Back in 1969, when they first developed the Oscillator and the Summation Index, all of the calculations were done manually since there was really no other way.  Almost no one had access to computers, and those who did would have to encode the data onto IBM punch cards (remember the hanging and pregnant chads?) and then feed them into the machine in order to do calculations.  I still remember when my father bought his first LED calculator for $110 in the early 1970s - - it was as large as hardcover book, and was powered by 4 C-cell batteries.  That was a lot of money to pay back then for something which just did the four main math functions, but they thought it was a bargain even at that price due to the onerous nature of doing all of the calculations longhand on scratch paper.

One thing that they quickly found in teaching people about these indicators is that several people had difficulty dealing with the minus signs in a complex operation.  If you subtract a negative number from another negative number, the minus signs start piling up and cancelling each other out, making them hard to keep track of.  That resulted in several people having trouble with the calculations.  My parents concluded that if they could deal with positive values for the Summation Index most of the time, they could help people cut down on the number of math errors related to negative values.  They had noticed in their previous calculations (data from the 1960s) that the swings up and down in the Summation Index then had an amplitude of about plus or minus 1000 points.  So they arbitrarily moved the neutral level up to +1000 so that the Summation Index would have a positive value most of the time.  And in the rare event that it ever did go below zero, that unusual negative number would be a big sign that the market was at a deeply oversold condition.

Choosing a neutral level other than zero is not what we would recommend now that the computers can take care of all the math, but it was a helpful change back then, and this tradition lives on our calculations.  To try and change back to a zero level for neutral in the classic Summation Index might confuse people, so we leave it as it is.  For Ratio-Adjusted Oscillator and Summation Index calculations, we do use the zero level as the neutral level.   

Sometime soon, we plan to expand that big table in our Daily Edition and include far more data.  It will have to move to page 2 of the Daily Edition to accommodate the need for more space.  We plan to add breadth data on subsets of the NYSE list, e.g. common only, bond funds, etc.  We will likely also switch to the ratio adjusted versions at that time.

The Nasdaq 100's McClellan Oscillator and Summation Index need no adjustment for a changing number of issues, since there are always 100 stocks in that index.  We do use the raw version of that, rather than the ratio-adjusted calculation method which we use for the big Nasdaq and NYSE data, for which we multiply the breadth ration by 1000 just to get it back up into the realm of real numbers.  The Summation Index for the Nasdaq 100 is neutral at zero.