McClennan Indices:
 The McClennan Oscillator
And
Summation Index

In developing a view on the overall condition of the stock market it helps to use the information distilled in equity indices. Two such indices are the McClennan Oscillator and the McClennan Summation Index, both of which were developed by Sherman McClennan in 1969.

The oscillator index is a breath of market indicator. It is based on the daily difference between advances and declines on the New York Stock Exchange. This difference is trended twice: by a faster twenty-day moving average and by a slower forty-day moving average. The numerical between these two trend values is the McClennan oscillator. It can have a plus 150 or a minus 250 reading, but more normally the range is between plus or minus 100. The values indicate overbought or oversold conditions and highlight a true trend when the reading moves solidly through zero. It is thus effective for interpreting short-term to inter-mediate market moves.

The summation index is a running total of each day's McClennan Oscillator value, it is thus effective for interpreting intermediate to long-term market movements. In essence both indicators help to initiate investment action when anticipated risks have been fully discounted in market prices. The main benefit of the Summation Index is that it is a sensitive indicator of total market trend and when used with other indices provides excellent information to ascertain the direction, strength and momentum of market direction.

When working with the McClennan indicators for investment in particular equities it is important to realise that not all stocks move in the same direction, at the same time, or at the same rate. Therefore, care must be taken that the particular stocks being purchased or sold have a high probability correlating with the stock market moves as measured by price and breath indices. Stocks that are in strong up trends or are under strong accumulation or are currently popular trading stocks will respond first to a market rally. They will reach overbought territory about the same time as the oscillator does. Money will then seek out average stocks that have not yet been bid up in price. Finally, lower price and lower quality stocks will be bid up in price.