Advance Decline Line Brings Good News and Bad

Friday, April 30, 2004 | 09:33 AM

There have been a few reports recently suggesting that the Bull move is over. Based upon deteriorating market breadth, these authors are predicting the end of the rally. Under specific circumstances, we’d be inclined to agree with that perspective. Typically speaking, a narrowing advance-declines line that diverges from a rallying market is cause for grave concern. Under those conditions, the A/D line would be an early signal of an imminent collapse.

That rule doesn’t apply to periods like now.

Why? We are in a rising rate environment. One should expect to see the NYSE experience a marked weakening in the number of advancing versus declining issues. The NYSE is home to a broad variety of interest rate sensitive issues. As the weakening NYSE A/D reveals, these are selling off in response to rising rates. Many of these issues have taken tumbles of 15% or greater. REITs, closed end bond funds, and other similar non-operating companies are doing exactly what they are supposed to do in this environment.

But that doesn’t mean the present A/D decline weakness is anything more than a concurrent - and not a leading - indicator. It is merely tracking a softening market, which is distracted by geopolitics, a rallying dollar, and valuation concerns. That situation is a far cry from times when the A/D line diverges from a strongly rallying market. Recall that divergence occurred in late 1999 and early 2000.

So the A/D line is falling with the market: That’s the good news. The bad news is that none of our favorite indicators have reached the point where we feel we must start getting long again. The one notable exception: The NYSE McClennan Oscillator has reached moderately oversold levels. Some practitioners use this Oscillator to provide a short term snapshot of when the market is getting oversold. But since it is essentially a breadth derived signal, I prefer to see it much more oversold, in light of the previously mentioned trading in interest rate sensitive REITs and Funds, before getting too excited.

Investors still remain quite optimistic, by most recent sentiment measures. Measures such as the AAII Bull Bear Ratio, the Volatility Index (VIX), and the Put/Call Ratio are still relatively strong (see nearby chart). On Wall Street, Pessimists are your potential buyers, while Optimists are potential sellers.

We continue to suggest trading smaller and less frequently until we see contrary extremes in these measures.

Friday, April 30, 2004 | 09:33 AM | Permalink | Comments (0) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

bn-image

TrackBack

TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8341c52a953ef00d83539bcbb69e2

Listed below are links to weblogs that reference Advance Decline Line Brings Good News and Bad :

Comments

The comments to this entry are closed.



Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      

Archives

Complete Archives List

Blogroll

Blogroll

Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:


Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites

FeedBurner


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo

Disclaimer

Disclaimer

Odds & Ends

Site by Moxie Design Studios™

FeedBurner