By TOMI KILGORE at Marketwatch
Some may question the predictive ability of any chart, set forward by one year. McClellan’s response: “You don’t have to understand the physics of something to accept and profit from it.”
Combined, he feels the charts’ message is pretty clear.
“We are already seeing confirming signs of liquidity problems in the weakening [advance-decline] line, which topped back in April and appears to be setting up for a major divergence [from the S&P 500], similar to 2000 and 2007,” McClellan wrote in a recent newsletter.
Other charts supporting the bearish view include the leveling off of Treasury and mortgage-backed securities held by the Federal Reserve after the end of quantitative easing, and the high level of taxation relative to gross domestic product.
End of QE could start weighing on stocks — soon.
But if he’s so sure that “a major price top” is coming, why is he still bullish for his short-, medium- and long-term trading styles? “If the top is still out in front of you, you don’t want to exit yet,” McClellan said. In other words, you don’t wear a raincoat today because a storm is coming tomorrow.
A rise in tax receipts to 18% of GDP has always led to recessions in the past
Many argue that trying to time the market so precisely not only increases risk, by raising the odds of being whipsawed — buying high and selling low, or vice-versa — but also fails to beat the more passive buy-and-hold strategy espoused by financial advisers.
“My mother used to say [that] everyone times the market,” according to McClellan. “Some people buy when they have money, and sell when they need it. Others use methods that are more sophisticated.”
You can decide whether you’re going to buy or sell, but you don’t get to set the price. “The timing [of a trade] is the only thing you have control over. Why abandon the only thing you have control over?” McClellan asked.
The bottom line is that, while it might seem counterintuitive, data provided by MarketWatch’s Mark Hulbert, editor of the newsletter-tracking Hulbert Financial Digest, shows that over the past couple of years, McClellan has helped his readers make money while also reducing risk.
Since Oct. 1, 2013, McClellan’s short-term timing signals have produced an annualized return of 14%, compared with a buy-and-hold return of 14.6%.
But the Sharpe ratio, used by modern portfolio theorists to gauge how much return they’re getting for the risk they are taking, was 0.54 for McClellan’s short-term signals, which was better than the risk-adjusted return reading of 0.47 for a buy-and-hold approach.
The Sharpe ratio for McClellan’s intermediate-term timing signals was also higher than for a buy-and-hold strategy, while his long-term signals came up a bit short.
He declined to comment on the growth of newsletter subscriptions over the years, but he did say he makes “a comfortable living” doing what he loves.
McClellan didn’t always love the stock market
The McClellan Oscillator started gaining acclaim when Tom was a child, but he didn’t become interested in his parents’ work until he grew up. “It’s only when I got older,” said McClellan, “that my parents got smarter.”
He took over the family business in 1995 after 11 years in the Army, and quickly started modernizing the process. When he published the first newsletter on a PDF file in 1997, McClellan said he had to call “several hundred subscribers” to explain how to download the software they needed to read it.
While technology has made his job easier over the years, the demands of a daily newsletter can still be daunting. During a recent so-called vacation in Guatemala, he had to break away every afternoon to work on his reports.
The only time he has taken off was when he had some guest writers, including his father, fill in for a few days while he had hip-replacement surgery. That’s when he realized, as demanding and emotionally taxing the daily commitment to analyzing and writing about the financial markets can be, he didn’t want to do anything else.
“I missed writing. I missed the daily involvement,” McClellan said. “It’s a challenge. But I love to work with indicators. I love my job.”