Common Only McClellan Oscillator

One of the questions we get asked frequently is about using Advance-Decline (A-D) data for common stocks versus for all listed issues on the NYSE.  There are many issues on the NYSE that trade like stocks, but which are not what we would all think of as representing ownership in operating companies.  These include bond related closed end funds (Bond CEFs), rights, warrants, structured products, and preferred stocks of operating companies.

A belief that is increasingly voiced by some users of A-D data is that these "uncommon" issues somehow contaminate the A-D data, and so to get the correct indications one should purify the numbers somehow so as not to be misled about the stock market by things that are not real stocks.  My view is that this issue has been overplayed, and is not as much of a problem as some people assert. 

This week's chart looks at the Common Only version of the McClellan A-D Oscillator.  For comparison below is the standard McClellan Oscillator which uses the "all issues" A-D data.  While the raw A-D Lines for the two groups can sometimes look different, the McClellan Oscillator measures the accelerations that take place in the A-D numbers.  



If you imagined two different cars driving the same course, they might have different times and maximum speeds.  But the acceleration profiles would look very similar, as they stopped at the same stop signs and then sped up again.  It is the same with the A-D data.  The A-D Line represents the total distance traveled, but the McClellan Oscillator measures the accelerations involved with the stops and starts.  


The main point to take from this comparison is that there is not a huge amount of difference in the chart structures of each of these versions of the McClellan Oscillator.  Obtaining purified breadth data may give a slightly more accurate picture of what a major segment of the stock market is doing, but it is a difficult task not normally available to most analysts.  The common only A-D data is typically only available well after the close of a trading day, or not until the weekend if one uses the Barron's numbers. 

And as we see from the comparisons of the Oscillator charts, there is not a huge difference in their acceleration behavior.