By Decision Point:
While most people follow the NYSE Advance-Decline Line, which is composed of the approximately 3500 issues traded on the NYSE DecisionPoint.com has 19 versions of the Advance-Decline (A-D) Line in order to more accurately portray the internal picture of specific market and sector indexes.
For example, the NYSE Composite Index is composed of only the 1839 common stocks traded on the NYSE, so we have constructed breadth and volume A-D Lines (displayed on the chart below) using only those 1839 common stocks. The first thing of note is the negative divergence that accompanied the bull market top in 2007. The most important feature of the moment is that the trend of both the breadth and volume lines confirms the strong rise in prices from the March 2009 lows.
Some will wonder if it is significant that the A-D Volume Line has exceeded its 2009 high. In my opinion it is not. Of importance is that the A-D Lines confirm the current medium-term price trend. Divergences spanning several years, in my observation, should be ignored.
The next chart is of the S&P 500 A-D Lines, which of course are composed of only the stocks in the S&P 500 Index. Note that we have the same negative divergence in 2008, and the same confirmation of the current bull market trend.
The next A-D Line chart is for the Rydex equal-weighted version of the S&P Utilities SPDR. The indicators are constructed from the 31 stocks currently assigned to the utilities sector. While the price index is challenging pervious highs, note that both the breadth and volume A-D Lines are diverging negatively, indicating that the bull market in the utilities sector may be over. My opinion is that this sector should be avoided until breadth and volume begin trending upward again.
Unlike many indicators and oscillators, the Advance-Decline Lines have a theoretically infinite range and are not subject to becoming overbought or oversold. Overall, they are confirming the current bull market. Look at the A-D Lines of specific sectors (we track the nine SPDR sectors) in order to find specific areas of weakness and strength.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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