Bulls Not Out Of Breadth

One year ago this week, April 12, 2016 to be exact, one of the more significant technical indicators, the New York Stock Exchange (NYSE) Composite Advance/Decline (A/D) line, broke out to a new high for the first time in a year. As we noted at the time, this type of internal market strength was a good sign for equities over the intermediate term, despite the skepticism expressed by many over equities and the economy. Fortunately this signal was correct, as just three months later (July 2016) the S&P 500 Index broke out to new highs for the first time in more than a year (May 2015).

First a step back, an A/D line shows how many stocks are advancing versus declining on a various index or stock exchange. If more stocks’ prices are rising than falling, that is considered a sign of underlying strength and suggests that stocks may have room to run. The flip side is, if many stocks are declining yet the overall index hasn’t yet broken lower, it is a warning sign something could be wrong as relatively few stocks are propping up the index.

Per Ryan Detrick, Senior Market Strategist, “A year ago when we saw the NYSE Advance/Decline line make new highs it helped support the bullish case for equities, no matter what scary headlines were out there—I’m looking at you Brexit and the U.S. election. Why bring it up now? It made another new all-time high last week— further supporting higher prices and the notion of buying on all inevitable dips.”

As the chart above shows, market breadth can provide warning signs for future equity weakness. In both the late ‘90s and leading up to the financial crisis in ’07-’08, market breadth broke down ahead of equity prices. With new highs taking place currently for market breadth, this is one positive for the bulls as we enter earnings season and the historically tricky summer months.

Last, the NYSE Composite A/D line is part of our Five Forecasters, which we examined in closer detail recently in How Much Is Left In The Tank?

 

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