Time to Sell, 'Duck-and-Cover' or Buy Stocks?

NEW YORK (TheStreet) -- June 21 was a painfully ugly day for the stock and commodity markets. Unless you were short the markets, you probably felt a bit traumatized by the closing bell.

This week began with yet another "euro-centric" down day for all the stock market averages, although gold and gold stocks had a positive day with the yellow metal up nearly $18 an ounce.

As most of us realize, trying to predict what the markets will do tomorrow is almost as hard as trying to predict who will win the World Series in October or the Super Bowl next winter.

There are some indications and reliable indicators that do give us some clues. One of these is a momentum indicator that helps us to see whether the broader stock market is oversold or undersold.

I'm referring specifically to the McClellan Oscillator. The chart below is one of the many examples that one can find to illustrate what the MO looked like as of June 22.

Chart courtesy of DecisionPoint.com.

The MO is a way of measuring momentum based on a comparison of how many stocks are moving up or down in price (the Advance-Decline Ratio).

It is a breadth indicator derived from Net Advances, the number of advancing issues less the number of declining issues. You can learn more about the MO by clicking here.

The NYSE Summation Index chart, which correlates with the MO chart above, is explained adequately at StockCharts.com.

On Monday, towards the middle of the trading session, 81% of the 3,139 stocks that comprises the New York Stock Exchange index were declining in price, 17% were advancing and 2% were unchanged.

My point, and the point of showing you the trailing 12-month charts above, is that virtually every time the NYSE-MO (ratio adjusted) climbed to the 75 level or above, it was followed by a sharp correction in the major stock market indices.

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