Tom McClellan is a financial technician and firm believer in the use of technical analysis in order to determine market timing rather than doing analysis on individual stocks.
McClellan, who studied aerospace engineering at the U.S. Military Academy and then spent eleven years as a helicopter pilot, approaches market analysis from the perspective of an engineer.
His parents started out as technical analysts and in 1969 they developed what became known as the McClellan Oscillator as the basis for their forecasts. Tom left the Air Force in 1993 and joined his parents as a technical analyst applying what he calls “an engineer's approach” to the systems his parents developed in order to forecast future market turning points. As an engineer, his focus is on what the data really says rather than trying to interpret events according to the conventional methods used by other analysts.
MarketWatch conducted a telephonic interview with Tom McClelland and with this background knowledge of the analyst; we will examine some of the highlights coming out of the interview.
The timing model applied by McClellan is telling him that stock prices will be peaking sometime between 20 and 26 August which means that the indications are that right now he should have a bullish approach for the present. He adds however that he expects “nothing good for the bulls for the rest of the year.”
While he doesn't express a firm view on how far stocks might fall, he says it will be an “ugly decline” which could last into early 2016. The positive side of this forecast is that his analysis suggests that the bear market will not be as severe as that experienced in 2007 to 2009. During that period, the S&P 500 Index (SPX, +0.52%) plummeted by about 57% or the earlier 2000 to 2002 selloff when the index fall by 49%.
In McClellan’s words, “I try to get the direction right, and let the magnitude take care of itself.”
He is continually seeking patterns to assist him in forecasting the direction and timing of future market moves. He publishes a bimonthly newsletter as well as a weekly notice containing the information on the patterns he has discerned.
The S&P 500 index came within a whisper of a record high on 20 July, a move that suggests that the index is being propped up by a decreasing number of stocks, which makes it more vulnerable to a shock.
One reason McClellan expects a big selloff which might start as early as this week is a chart which indicates that liquidity in the financial markets is about to dry up as investors prepare for an inevitable interest rate hike from the Fed.
While there may be some doubters about the predictive ability of any chart looking a year ahead McClellan says, “You don't have to understand the physics of something to accept and profit from it.”
Questioned as to why, if he is so sure a “major price top” is coming, he is still bullish for his short, medium and long-term trading styles he answered, “If the top is still out in front of you, you don't want to exit yet.” The analogy would be that you don't put on a coat in summer because winter is coming.
McClellan has the view that investors have very little control over the markets other than to decide whether to buy or sell, but not the price, and of course the timing. “The timing [of a trade] is the only thing you have control over. Why abandon the only thing you have control over,” was his comment in this regard.
The short term trading signals from McClellan have produced an annualized return of 14% since October 1, 2013 compared with a buy-and-hold return of 14.6%.