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Friday, May 29, 2015 4:05:39 PM
New Highs In Cumulative A/D Is Not Confirmation Of A Healthy Market
By Urban Carmel
* Thursday, May 28, 2015
Summary: Cumulative advance-decline (A/D) is one of the most popular ways to measure market health using breadth data. But cumulative A/D has given no warning before any drop in equities of 5% or more since the 2009 low, including the 20% drop in 2011. That cumulative A/D made a new high last week is not confirmation that the underlying market is healthy.
* * *
In September 2014, the cumulative advance-decline (A/D) line for the S&P hit a new high. A month later, the stock index was down 10%.
Twice in December 2014 and again in February 2015, the cumulative A/D line hit new highs and within two weeks the stock indices lost 5% (twice) and 4%.
Among the ways of measuring market health, this is one of the consistently least useful. There are two big problems with it.
The first is conceptual. Cumulative A/D takes the number of stocks moving up on a day and subtracts the number of stocks moving down. That sum is then added to yesterday's total.
If a lot of small stocks move up by one penny on low volume but slightly fewer large companies move down a dollar on high volume, the cumulative A/D line moves higher. Or, if a large number of defensive stocks move up while "risk-on" cyclical stocks move down, the cumulative A/D line moves higher. Neither one of these is a healthy sign.
The second problem is empirical. Every fall of 5% or more since the 2009 low has started from a new high in cumulative A/D. This includes several 10% declines and the 20% decline in 2011. It's hard to be enthusiastic about a measure of stock market health that gives no warning before a 20% fall in equities. These instances are shown below below (cumulative A/D in top panel and the S&P in the lower panel; the zig zag is set for declines greater than 5%).
The S&P's 20% fall in 2011 is shown below. Remarkably, even as price made a lower high in July, cumulative A/D made a higher high (green line).
In it's defense, a drop in cumulative A/D did lead the 2007 top in the S&P by four months. But if that seems useful, bear in mind that cumulative A/D lead the 2000 top by 15 months, during which the index rose more than 20%. In real time, using this information with strong conviction is next to impossible.
In the examples above, we have used the A/D data for the S&P alone. It's also possible to use common stock-only A/D for the NYSE as well as the full NYSE. The latter is problematic as it includes a growing number of funds as well as preferred shares.
Cumulative A/D is one of the most popular ways to measure market health using breadth data. But cumulative A/D has given no warning before any drop in equities of 5% or more since the 2009 low, including the 20% drop in 2011. That cumulative A/D made a new high last week is not confirmation that the underlying market is healthy.
http://fat-pitch.blogspot.com/2015/05/new-highs-in-cumulative-ad-is-not.html?spref=tw
George.
Click on "In reply to", for Authors past commentaries.
By Urban Carmel
* Thursday, May 28, 2015
Summary: Cumulative advance-decline (A/D) is one of the most popular ways to measure market health using breadth data. But cumulative A/D has given no warning before any drop in equities of 5% or more since the 2009 low, including the 20% drop in 2011. That cumulative A/D made a new high last week is not confirmation that the underlying market is healthy.
* * *
In September 2014, the cumulative advance-decline (A/D) line for the S&P hit a new high. A month later, the stock index was down 10%.
Twice in December 2014 and again in February 2015, the cumulative A/D line hit new highs and within two weeks the stock indices lost 5% (twice) and 4%.
Among the ways of measuring market health, this is one of the consistently least useful. There are two big problems with it.
The first is conceptual. Cumulative A/D takes the number of stocks moving up on a day and subtracts the number of stocks moving down. That sum is then added to yesterday's total.
If a lot of small stocks move up by one penny on low volume but slightly fewer large companies move down a dollar on high volume, the cumulative A/D line moves higher. Or, if a large number of defensive stocks move up while "risk-on" cyclical stocks move down, the cumulative A/D line moves higher. Neither one of these is a healthy sign.
The second problem is empirical. Every fall of 5% or more since the 2009 low has started from a new high in cumulative A/D. This includes several 10% declines and the 20% decline in 2011. It's hard to be enthusiastic about a measure of stock market health that gives no warning before a 20% fall in equities. These instances are shown below below (cumulative A/D in top panel and the S&P in the lower panel; the zig zag is set for declines greater than 5%).
The S&P's 20% fall in 2011 is shown below. Remarkably, even as price made a lower high in July, cumulative A/D made a higher high (green line).
In it's defense, a drop in cumulative A/D did lead the 2007 top in the S&P by four months. But if that seems useful, bear in mind that cumulative A/D lead the 2000 top by 15 months, during which the index rose more than 20%. In real time, using this information with strong conviction is next to impossible.
In the examples above, we have used the A/D data for the S&P alone. It's also possible to use common stock-only A/D for the NYSE as well as the full NYSE. The latter is problematic as it includes a growing number of funds as well as preferred shares.
Cumulative A/D is one of the most popular ways to measure market health using breadth data. But cumulative A/D has given no warning before any drop in equities of 5% or more since the 2009 low, including the 20% drop in 2011. That cumulative A/D made a new high last week is not confirmation that the underlying market is healthy.
http://fat-pitch.blogspot.com/2015/05/new-highs-in-cumulative-ad-is-not.html?spref=tw
George.
Click on "In reply to", for Authors past commentaries.
Information posted to this board is not meant to suggest any specific action, but to point out the technical signs that can help our readers make their own specific decisions. Your Due Dilegence is a must!
gtsourdinis
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