What it means
Most people judge the stock market by an index such as an average of large companies. The McClellan indicators look underneath that by counting how many shares advance and decline each day, which is called market breadth.
A rising market in which only a few shares are climbing is generally seen as less trustworthy. The starting point is the daily net advances, meaning the number of shares that rose minus the number that fell.
The McClellan Oscillator smooths this figure with two moving averages, a faster 19-day one and a slower 39-day one, and takes the gap between them. A positive reading means breadth is improving, and a negative one means it is worsening.
The Summation Index then keeps a running total of the oscillator. Because it accumulates, it moves slowly and shows the larger trend, so a rising Summation Index suggests that the market's underlying support is growing.
A falling one suggests it is draining away. Analysts look for several patterns.
A Summation Index above zero is read as a healthy backdrop, while one below zero is read as a weak backdrop. A divergence, where the share index makes a new high but the Summation Index does not, is often taken as a warning that the rally is losing breadth.
Like all technical indicators, it is a tool for judgement and not a guarantee. It was developed by Sherman and Marian McClellan in the 1960s and 1970s, and users differ on exact versions, such as whether to use a ratio-adjusted form.
Finance teams rarely trade on it, but they may see it quoted in market commentary.
In practice
Real-world examples.
Example
A market strategist writes a weekly note for clients and sees that a major share index has hit a new high. The Summation Index is falling at the same time, so she warns that fewer shares are taking part in the rally. She advises clients to be cautious about adding risk.
Example
A fund manager keeps a dashboard of breadth indicators for his team. When the Summation Index crosses from below zero to above zero, he reviews the fund's cash level. He uses the signal as one input among many, not as an instruction to buy.
Example
A financial journalist explains to readers why the market feels shaky despite record index levels. She cites the Summation Index and the McClellan Oscillator as evidence that breadth has narrowed. Her article makes clear that the indicator is a tool for judgement and not a forecast.
Formula
Calculation
Net advances = Advancing shares - Declining shares
McClellan Oscillator = 19-day EMA of net advances - 39-day EMA of net advances
Summation Index = Previous Summation Index + Today's McClellan Oscillator
EMA means exponential moving average, an average that gives more weight to recent days. Suppose the 19-day EMA is 42 and the 39-day EMA is 17, so the oscillator reads 42 - 17 = 25. If the previous Summation Index was 100, then today's value is 100 + 25 = 125. Over the next four days, oscillator readings of +35, -10, -25 and +15 take the index to 125 + 35 = 160, then 150, then 125, then 140.Case study
Seen in the real world.
Summit Ridge Advisers is an illustrative, fictional investment advisory firm that publishes a monthly market review. In one review the analyst noted that the main share index was up 6% over three months, yet the Summation Index had fallen by 180 points over the same period.
The analyst explained to clients that fewer shares were taking part in the rise, which in the past had often come before a pullback. The firm trimmed its equity exposure from 70% to 62% of client portfolios, a modest change designed to limit regret on either side.
The market later slipped by about 5% before recovering. In this illustrative case the indicator did not predict the exact move, but it prompted a sensible discussion about risk, and the firm stressed that it was one signal among many.
Watch out
Common mistakes.
- Treating the Summation Index as a precise forecasting tool, when it only describes the breadth of the market and can give false signals.
- Confusing the oscillator with the Summation Index, when the first is a daily gap between two averages and the second is its running total.
- Comparing readings across different versions of the indicator, such as the ratio-adjusted and unadjusted forms, which use different scales.
Questions
People also ask.
What does a negative Summation Index mean?
It means the accumulated breadth readings have been mostly negative, which analysts read as a weak background for share prices.
Why use two moving averages?
The difference between a fast and a slow average shows whether breadth is accelerating or fading.
Who created the indicator?
It was created by Sherman and Marian McClellan, and it is named after them.
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